 Dynamic Oligopoly and Price StickinessNo 1029, 2018 Meeting Papers from Society for Economic Dynamics Abstract: I study the relationship between aggregate consumption and interest rates when markets are incomplete. I first provide a generalized Euler relation involving the real interest rate, current and future aggregate consumption under extreme illiquidity (no borrowing and no outside assets). This provides a tractable way of incorporating incomplete markets into macroeconomic models. When household income risk is acyclical I show that this relation coincides with that of a representative agent, although time-varying discount factors may potentially act as aggregate demand shocks. The same representation extends to the case with positive liquidity as long as liquidity relative to income is acyclical. A corollary of these `as if' results is that forward guidance policies are as powerful as in representative agent models. Away from the `as if' benchmark, I show that aggregate consumption becomes more sensitive to interest rates, especially future ones, when idiosyncratic income risk is countercyclical or when liquidity is procyclical. Finally, I also apply my analysis to a Real Business Cycle model, providing an exact analytical aggregation result that complements existing numerical findings. Date: 2018 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:1029 Access Statistics for this paper More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC. |
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