Optimal Monetary Policy and Liquidity with Heterogeneous Households

Bilbiie, Florin; Ragot, Xavier

Optimal Monetary Policy and Liquidity with Heterogeneous Households

Abstract: A liquidity-insurance motive for monetary policy operates when heterogeneous households use government-provided liquidity ("money") to insure idiosyncratic risk. In our tractable sticky-price model this changes the central bank's trade-off by adding a linear benefit of insurance in the second-order approximation to aggregate welfare. Inflation volatility hinders the consumption volatility of constrained households as a side-effect of liquidity-insuring them; but price stability has quantitatively significant welfare costs only when monopolistic rents are also large, which indicates a complementarity between imperfect-insurance and New-Keynesian distortions. Helicopter drops are welfare-superior to open-market operations to achieve insurance, but quantitatively their benefit is surprisingly small.

Keywords: Optimal (Ramsey) Monetary Policy; Heterogeneous Households; Incomplete Markets; Money; Inequality; Helicopter Drops (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-dge and nep-mon
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03501417
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Published in Review of Economic Dynamics, 2021, 41, pp.71-95. ⟨10.1016/j.red.2020.10.003⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03501417

DOI: 10.1016/j.red.2020.10.003

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