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Limited Asset Markets Participation, Monetary Policy and (Inverted) Keynesian Logic

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Author Info
Florin Bilbiie () (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence)

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Abstract

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While 'moderate' participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by ('Keynesian') conventional wisdom. The slope of the 'IS' curve changes sign, the 'Taylor principle' is inverted, optimal welfare-maximizing monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. The conditions for these results to hold are relatively mild compared to some existing empirical evidence. Our results may help explain the 'Great Inflation' and justify Fed behavior during that period.

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Publisher Info
Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W09.

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Length: 42 pages
Date of creation: 01 Mar 2005
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Handle: RePEc:nuf:econwp:0509

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Web page: http://www.nuff.ox.ac.uk/economics/

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Related research
Keywords: limited asset markets participation dynamic general equilibrium aggregate demand Taylor Principle optimal monetary policy real (in)determinacy

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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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.:
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  3. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
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  19. Galí, Jordi, 2002. "New Perspectives on Monetary Policy, Inflation and the Business Cycle," CEPR Discussion Papers 3210, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, 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.)

  1. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers 5212, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Di Bartolomeo Giovanni & Rossi Lorenza, 2007. "Heterogeneous consumers, demand regimes, monetary policy and equilibrium determinacy," wp.comunite 0024, Department of Communication, University of Teramo. [Downloadable!]
    Other versions:
  3. Colciago, Andrea, 2006. "Rule of Thumb Consumers Meet Sticky Wages," MPRA Paper 3275, University Library of Munich, Germany, revised 27 Apr 2007. [Downloadable!]
  4. Roland Straub & Florin Bilbiie, 2006. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," IMF Working Papers 06/200, International Monetary Fund. [Downloadable!]
  5. Andrea Colciago, 2006. "Sticky wages and rule of thumb consumers," Working Papers 98, University of Milano-Bicocca, Department of Economics, revised Sep 2006. [Downloadable!]
  6. Florin Ovidiu Bilbiie & André Meier & Gernot J. Müller, 2006. "Bank interest rate pass-through in the euro area: a cross country comparison," Working Paper Series 582, European Central Bank. [Downloadable!]
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