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.

Date: 2020-09
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in Review of Economic Dynamics, 2020, 41, pp.71-95. ⟨10.1016/j.red.2020.10.003⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03100875

DOI: 10.1016/j.red.2020.10.003

Access Statistics for this paper

More papers in SciencePo Working papers Main from HAL
Bibliographic data for series maintained by Contact - Sciences Po Departement of Economics ().