 Optimal Monetary Policy and Liquidity with Heterogeneous HouseholdsFlorin Bilbiie and Xavier Ragot Review of Economic Dynamics, 2021, vol. 41, 71-95 Abstract: A liquidity-insurance motive for monetary policy operates when heterogeneous households use government-provided liquidity ("money") to insure idiosyncratic risk. In our tractable sticky-price model this changes the central bank's trade-off by adding a linear benefit of insurance in the second-order approximation to aggregate welfare. Inflation volatility hinders the consumption volatility of constrained households as a side-effect of liquidity-insuring them; but price stability has quantitatively significant welfare costs only when monopolistic rents are also large, which indicates a complementarity between imperfect-insurance and New-Keynesian distortions. Helicopter drops are welfare-superior to open-market operations to achieve insurance, but quantitatively their benefit is surprisingly small. (Copyright: Elsevier) Keywords: Optimal (Ramsey) monetary policy; Heterogeneous households; Incomplete markets; Liquidity constraints; Limited participation; Money; Insurance; Inequality; Helicopter drops; Open market operations (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:red:issued:20-11 Ordering information: This journal article can be ordered from DOI: 10.1016/j.red.2020.10.003 Access Statistics for this article Review of Economic Dynamics is currently edited by Loukas Karabarbounis More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC. |
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