Asset Market Participation, Monetary Policy Rules, and the Great Inflation

Florin Bilbiie and Roland Straub
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Roland Straub: European Central Bank

The Review of Economics and Statistics, 2013, vol. 95, issue 2, 377-392

Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s and their changes thereafter. In an otherwise conventional sticky-price model, standard aggregate demand logic is inverted at low enough asset market participation: interest rate increases become expansionary, and passive monetary policy ensures equilibrium determinacy and maximizes welfare. This suggests that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom implies. We provide empirical evidence consistent with this hypothesis and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Keywords: asset market participation; monetary policy rules; U.S. macroeconomic performance; Great Inflation; Great Moderation (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 E58 E65 N12 N22 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (41)

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Related works:
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2013)
Working Paper: Asset market participation, monetary policy rules and the great inflation (2012)
Working Paper: Asset Market Participation, Monetary Policy Rules and the Great Inflation (2011)
Working Paper: Asset Market Participation, Monetary Policy Rules, and the Great Inflation (2006)
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