Optimal Monetary Policy with Heterogeneous Agents
Galo Nuño Barrau () and
Carlos Thomas ()
No 8670, CESifo Working Paper Series from CESifo
We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. 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; Gâteau derivative; nominal debt; inflation; redistributive effects; continuous time (search for similar items in EconPapers)
JEL-codes: E50 E62 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8670
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