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Optimal Monetary Policy with Heterogeneous Agents

Galo Nuño Barrau () and Carlos Thomas ()

No 8670, CESifo Working Paper Series from CESifo

Abstract: 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)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-upt
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