his paper considers the properties of an optimal monetary policy when households are subject to counter-cyclical uninsured income shocks. We develop a tractable incomplete-markets model with Calvo price setting. In our model the welfare cost of business cycles is large when the variance of income shocks is counter-cyclical. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number
09050.
Length: 24 pages Date of creation: Oct 2009 Date of revision: Handle: RePEc:eti:dpaper:09050
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