Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Policy with Liquidity Frictions

Contents:

Author Info

  • Oscar Mauricio VALENCIA A.

    ()

Abstract

This paper explores the welfare effects of a reduction in the inflation rates in an environment of incomplete markets. We built a dynamic heterogeneous agent model that features idiosyncratic risks in the labor supply and liquidity frictions. The model shows that a disinflation policy results in an income reallocation among debtors and lenders. The changes in the capital returns conveys variations in the precautionary savings and hence, an intertemporal redistribution of wealth and income. The welfare implications are develop according to the incomplete market features and the money plays a role of smoothing consumption when the agents faces income variability without state contingent insurance. The model is calibrated for the Colombian economy in such a way that disinflation episodes are replicated. Early results show that the disinflation monetary policy leads to improvements of liquidity in the economy because the money holdings are used by the agents for wealth transfer over time. This paper shows quantitative evidence in which disinflation facts are associated with increments in the average real money holdings and average consumption. In addition, the volatility of consumption is reduced as the inflation rate falls, while the volatility of money holdings increases (i.e precautionary demand for money balance).

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: https://colaboracion.dnp.gov.co/CDT/Estudios%20Econmicos/328.pdf
Download Restriction: no

Bibliographic Info

Paper provided by DEPARTAMENTO NACIONAL DE PLANEACIÓN in its series ARCHIVOS DE ECONOMÍA with number 011221.

as in new window
Length: 28
Date of creation: 15 Feb 2007
Date of revision:
Handle: RePEc:col:000118:011221

Contact details of provider:

Related research

Keywords: Monetary Policy; Heterogenous Agents; Stationary Distribution;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-88, Wharton School Rodney L. White Center for Financial Research.
  2. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers, Federal Reserve Bank of Minneapolis 502, Federal Reserve Bank of Minneapolis.
  3. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1245-1269, September.
  4. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, Elsevier, vol. 16(2), pages 252-292, December.
  5. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(1), pages 55-71, July.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:col:000118:011221. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bricelda Delgado Martínez).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.