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Monetary Shocks Under Incomplete Markets

Yann Algan (), Olivier Allais, Edouard Challe and Xavier Ragot ()
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Olivier Allais: Laboratoire de Recherche sur la Consommation

Sciences Po publications from Sciences Po

Abstract: This paper provides a systematic quantification of the short-run effects of monetary policy shocks under incomplete markets. Our framework of analysis is the benchmark flexible-price neoclassical growth model with infinitely-lived and ex ante identical individuals, which we augment with i. uninsurable idiosyncratic labor income shocks; ii. a liquidity motive for holding real money balances (via a money-in-the-utility specification); and iii. aggregate shocks to the rate of money growth. We calibrate the model so as to match the historical inflation process as well as the broad features of the cross-sectional distributions of monetary and nonmonetary assets in the US economy. Our main finding is that, even though market incompleteness has a moderate impact on the response of aggregates to the shocks (relative to the complete-market case), this results from composition effects that mask a great deal of cross household redistribution and heterogeneities in individual portfolio adjustments.

Keywords: Money-in-the-utility; Incomplete Markets; Monetary Shocks (search for similar items in EconPapers)
JEL-codes: E21 E32 E41 (search for similar items in EconPapers)
Date: 2012-03
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