Monetary Policy with Heterogeneous Agents and Borrowing Constraints

Yann Algan and Xavier Ragot

SciencePo Working papers Main from HAL

Abstract: We show that the long-run neutrality of inflation on capital accumulation obtained in complete market models no longer holds when households face binding credit constraints. Borrowing-constrained households are not able to rebalance their financial portfolio when inflation varies, and thus adjust their money holdings differently compared to unconstrained households. This heterogeneity leads to a new precautionary savings motive, which implies that inflation increases capital accumulation. We quantify the importance of this new channel in an incomplete market model where the traditional redistributive effects of inflation are also introduced. We show that this model provides a quantitative rationale for the observed hump-shaped relationship between inflation and capital accumulation.

Keywords: Incomplete Markets; Monetary Policy (search for similar items in EconPapers)
Date: 2010-04
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01170621
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Published in Review of Economic Dynamics, 2010, 13 (2), pp.295-316. ⟨10.1016/j.red.2009.05.001⟩

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Journal Article: Monetary policy with Heterogeneous Agents and Borrowing Constraints (2010)
Working Paper: Monetary Policy with Heterogeneous Agents and Borrowing Constraints (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-01170621

DOI: 10.1016/j.red.2009.05.001

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