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Monetary policy with heterogenous agents and credit constraints

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Author Info
Yann Algan
Xavier Ragot

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Abstract

This paper analyzes the long-run effect of monetary policy when credit constraints are taken into account. This analysis is carried on in a heterogeneous agents framework in which infinitely lived agents can partially self-insure against income risks by using both financial assets and real balences. First we show theoretically that financial borrowing constraints give rise to an heterogeneity in money demand, leading to a real effect of inflation. Secondly, we show that inflation has a quantitative positive impact on output and consumption in economies which closely match the wealth distribution of the United States. Thirdly, we find that the average welfare cost of inflation is much smaller compared to a complete market economy, and that inflation induces important redistributive effects across households.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2005-45.

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Date of creation: 2005
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Handle: RePEc:pse:psecon:2005-45

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  19. Heathcote, Jonathan, 2001. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers 01-03, Duke University, Department of Economics. [Downloadable!]
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  20. Norman Loayza & Klaus Schmidt-Hebbel & Luis Servén, 2000. "What Drives Private Saving Across the World?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 165-181, May. [Downloadable!] (restricted)
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  21. Charles GRANT, 2003. "Estimating Credit Constraints among US Households," Economics Working Papers ECO2003/14, European University Institute. [Downloadable!]
  22. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 465-89, July. [Downloadable!] (restricted)
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  24. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October. [Downloadable!] (restricted)
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  25. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
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  26. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May. [Downloadable!] (restricted)
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  1. Xavier Ragot, 2008. "The case for a financial approach to money demand," PSE Working Papers 2008-56, PSE (Ecole normale supérieure). [Downloadable!]
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