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Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective

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  • Kryvtsov, Oleksiy
  • Shukayev, Malik
  • Ueberfeldt, Alexander

Abstract

This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy by changing real returns of nominal bonds via variation in expected inflation. Optimal expected inflation is procylical and on average higher than without uncertainty. Simple inflation targeting rules closely approximate the optimal monetary policy.

Suggested Citation

  • Kryvtsov, Oleksiy & Shukayev, Malik & Ueberfeldt, Alexander, 2011. "Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1045-1060, July.
  • Handle: RePEc:eee:dyncon:v:35:y:2011:i:7:p:1045-1060
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    References listed on IDEAS

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    12. Oleksiy Kryvtsov & Malik Shukayev & Alexander Ueberfeldt, 2007. "Optimal Monetary Policy and Price Stability Over the Long-Run," Staff Working Papers 07-26, Bank of Canada.
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