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Money Targeting, Heterogeneous Agents and Dynamic Instability

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  • Giorgio Motta
  • Patrizio Tirelli

Abstract

Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest-bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption differences and the model is determinate provided that the non-negativity constraint on individual money holdings is satisfied.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper257.pdf
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 257.

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Length: 37
Date of creation: Oct 2013
Date of revision: Oct 2013
Handle: RePEc:mib:wpaper:257

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Keywords: Rule of Thumb Consumers; DSGE; Determinacy; Limited Asset Market Participation; Money Targeting;

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References

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the U.S. Business Cycle," NBER Working Papers 10724, National Bureau of Economic Research, Inc.
  2. repec:fth:harver:1435 is not listed on IDEAS
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  4. Hyung Sun Choi, 2011. "Monetary Policy And Endowment Risk In A Limited Participation Model," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 89-93, 01.
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  6. Giorgio Motta & Patrizio Tirelli, 2011. "Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation," Working Papers 204, University of Milano-Bicocca, Department of Economics, revised Mar 2011.
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  10. Ascari, Guido & Colciago , Andrea & Rossi, Lorenza, 2011. "Limited asset market participation: does it really matter for monetary policy?," Research Discussion Papers 15/2011, Bank of Finland.
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  15. Forni, Lorenzo & Monteforte, Libero & Sessa, Luca, 2009. "The general equilibrium effects of fiscal policy: Estimates for the Euro area," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 559-585, April.
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  17. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
  18. Colciago, Andrea, 2005. "Rule of Thumb Consumers Meet Sticky Wages," MPRA Paper 3275, University Library of Munich, Germany, revised 27 Apr 2007.
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