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Optimal monetary policy with heterogeneous agents (Updated September 2019)

Galo Nuño Barrau () and Carlos Thomas ()

No 1624, Working Papers from Banco de España, Working Papers Homepage

Abstract: We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal claims and costly inflation. Our model features two prominent redistributive channels of monetary policy: the classic Fisherian channel, and unhedged interest rate exposure (URE). The former introduces a “redistributive inflationary bias”, stemming from the fact that debtors (who benefit from inflation) have a higher marginal utility than creditors. This bias is counteracted over time by a disinflationary motive: a commitment to low future inflation raises bond prices, benefiting bond-issuing households (i.e. those with negative URE), who also have a higher marginal utility than bond-purchasing ones. The result is optimal inflation front-loading. Under certain conditions, both motives cancel out asymptotically and optimal long-run inflation is zero. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-à-vis a zero inflation policy.

Keywords: optimal monetary policy; incomplete markets; Gâteaux derivative; nominal debt; inflation; redistributive effects; continuous time (search for similar items in EconPapers)
JEL-codes: E5 E62 F34 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2016-10, Revised 2019-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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