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On the non-neutrality and optimality of monetary policy when financial markets are incomplete: a macroeconomic perspective

  • Portier, Franck
  • Tallon, Jean-Marc

We study in this paper a simple model of a two-period economy, with two states of the world in the second period, two agents and one good. Financial markets are incomplete since only inside money is available. We show that outside money, which is introduced in the model through its role as a medium of exchange, is non-neutral, in the sense that it has an effect on the equilibrium allocation. We then discuss whether a monetary policy that would aim at state-independent price levels is desirable. We illustrate that discussion with a few examples. The possible sub-optimality of a constant-across-states inflation rates target for monetary policy is to be contrasted with results from representative agent macroeconomic models.

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File URL: http://www.sciencedirect.com/science/article/pii/0035-5054(95)90009-8
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Article provided by Elsevier in its journal Ricerche Economiche.

Volume (Year): 49 (1995)
Issue (Month): 1 (March)
Pages: 33-49

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Handle: RePEc:eee:riceco:v:49:y:1995:i:1:p:33-49
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

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  1. Geanakoplos, John & Mas-Colell, Andreu, 1989. "Real indeterminacy with financial assets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 22-38, February.
  2. Balasko, Yves & Cass, David & Siconolfi, Paolo, 1990. "The structure of financial equilibrium with exogenous yields : The case of restricted participation," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 195-216.
  3. Gottardi, P., 1990. "On The Non Neutrality Of Money With Incomplete Market," Papers 158, Cambridge - Risk, Information & Quantity Signals.
  4. Magill, M. & Quinzii, M., 1992. "Real effects of money in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 301-342.
  5. Cass, David & Green, Richard C & Spear, Stephen E, 1992. "Stationary Equilibria with Incomplete Markets and Overlapping Generations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 495-512, August.
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