Optimal monetary policy under incomplete markets and aggregate uncertainty: A long-run perspective
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.
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.:
- S. Rao Aiyagari, 1993.
"Uninsured idiosyncratic risk and aggregate saving,"
502, Federal Reserve Bank of Minneapolis.
- Matthias Doepke & Martin Schneider, 2006.
"Aggregate Implications of Wealth Redistribution: The Case of Inflation,"
UCLA Economics Working Papers
846, UCLA Department of Economics.
- Matthias Doepke & Martin Schneider, 2006. "Aggregate Implications of Wealth Redistribution: The Case of Inflation," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 493-502, 04-05.
- Doepke, Matthias & Schneider, Martin, 2006. "Aggregate Implications of Wealth Redistribution: The Case of Inflation," CEPR Discussion Papers 5552, C.E.P.R. Discussion Papers.
- Krusell, P & Smith Jr, A-A, 1995.
"Income and Wealth Heterogeneity in the Macroeconomic,"
RCER Working Papers
399, University of Rochester - Center for Economic Research (RCER).
- Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
- Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
- Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
- Bhattacharya, Joydeep & Singh, Rajesh, 2008. "Optimal Monetary Policy Rules Under Persistent Shocks," Staff General Research Papers 12863, Iowa State University, Department of Economics.
- 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.
- Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
- Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
- Césaire A. Meh & Yaz Terajima, 2011.
"Inflation, nominal portfolios, and wealth redistribution in Canada,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 44(4), pages 1369-1402, November.
- Césaire Meh & Yaz Terajima, 2008. "Inflation, Nominal Portfolios, and Wealth Redistribution in Canada," Staff Working Papers 08-19, Bank of Canada.
- Peter A. Diamond, 1965. "On the Cost of Tax-exempt Bonds," Journal of Political Economy, University of Chicago Press, vol. 73, pages 399.
- Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
- Bhattacharya, Joydeep & Singh, Rajesh, 2010. "Optimal monetary rules under persistent shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1277-1294, July.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:35:y:2011:i:7:p:1045-1060. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.