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Efficacy of Monetary Policy and Limited Asset Market Participation

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Author Info

  • Giovanni Di Bartolomeo

    (Università di Roma La Sapienza)

  • Lorenza Rossi

    (Università di Roma Tor Vergata)

Abstract

A common wisdom argues that limited asset market participation reduces the efficacy of monetary policy. This paper investigates this issue in the context of the New Keynesian dynamic stochastic general equilibrium models. Despite limited participation actually reduces effects of interest rate policies by reducing the effect on inter-temporal allocation of consumption, we find an opposite result. Monetary policy becomes more effective as long as the share of agents who cannot access to the financial market increases. The reason has a very Keynesian flavor.

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File URL: http://128.118.178.162/eps/mac/papers/0508/0508027.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0508027.

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Length: 9 pages
Date of creation: 25 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0508027

Note: Type of Document - pdf; pages: 9
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Web page: http://128.118.178.162

Related research

Keywords: Consumers’ heterogeneity; efficacy of monetary policy; rule- of-thumb.;

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References

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  1. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
  2. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," NBER Working Papers 7571, National Bureau of Economic Research, Inc.
  3. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
  4. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," CEPR Discussion Papers 4347, C.E.P.R. Discussion Papers.
  5. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  6. V. Anton Muscatelli & Tiziano Ropele & Patrizio Tirelli, 2004. "Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints," Working Papers 83, University of Milano-Bicocca, Department of Economics, revised Nov 2004.
  7. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October.
  8. Ahmad, Yamin, 2005. "Money market rates and implied CCAPM rates: some international evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 699-729, September.
  9. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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Citations

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Cited by:
  1. Colciago, Andrea, 2005. "Rule of Thumb Consumers Meet Sticky Wages," MPRA Paper 3275, University Library of Munich, Germany, revised 27 Apr 2007.
  2. Di Bartolomeo, Giovanni & Manzo, Marco, 2007. "Do tax distortions lead to more indeterminacy? A New Keynesian perspective," MPRA Paper 3549, University Library of Munich, Germany.
  3. Camelia Ioana Ucenic & Laura Bacali, 2008. "The Impact Of It Advance Of Smes� For The Romanian Economy," Working Papers 0804, University of Crete, Department of Economics.
  4. 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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