Money Targeting, Heterogeneous Agents and Dynamic Instability

Giorgio Motta and Patrizio Tirelli

No 257, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest-bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption differences and the model is determinate provided that the non-negativity constraint on individual money holdings is satisfied.

Keywords: Rule of Thumb Consumers; DSGE; Determinacy; Limited Asset Market Participation; Money Targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 37
Date: 2013-10, Revised 2013-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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http://repec.dems.unimib.it/repec/pdf/mibwpaper257.pdf First version, 2013 (application/pdf)

Related works:
Journal Article: MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY (2015)
Working Paper: Money Targeting, Heterogeneous Agents and Dynamic Instability (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:257

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