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Monetary-Policy Tradeoff in Overlapping Generations DSGE Models

Benjamin Carton ()

No 28, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: We evaluate optimal monetary policy in the standard sticky-price DSGE model in which overlapping-generations households à la Blanchard-Yaari replace the infinitely lived representative household. With nominal rigidities, monetary policy faces a new trade-off between inflation and intergenerational inequalities. This trade-off is related to the inability of future generations to trade on the financial market in order to hedge against shocks that appear during the birth period. If the fiscal authority hedges households against those shocks and then equalizes consumption among households, non-Ricardian behaviors disappear and the monetary policy trade-off is the same as in a fully Ricardian economy. Otherwise optimal monetary policy should be less proactive and let appear a much larger inflation surge.

Pages: 34 pages
Date: 2012-11
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