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
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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
https://www.bde.es/f/webbde/SES/Secciones/Publicac ... /16/Fich/dt1624e.pdf Updated version, September 2019 (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1624
Access Statistics for this paper
More papers in Working Papers from Banco de España, Working Papers Homepage Contact information at EDIRC.
Bibliographic data for series maintained by María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España ().