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Monetary policy with Heterogeneous Agents and Borrowing Constraints

Author

Listed:
  • Yann Algan

    (Paris School of Economics)

  • Xavier Ragot

    (Banque de France)

Abstract

We show that the long-run neutrality of inflation on capital accumulation obtained in complete market models no longer holds when households face binding credit constraints. Borrowing-constrained households are not able to rebalance their financial portfolio when inflation varies, and thus adjust their money holdings differently compared to unconstrained households. This heterogeneity leads to a new precautionary savings motive, which implies that inflation increases capital accumulation. We quantify the importance of this new channel in an incomplete market model where the traditional redistributive effects of inflation are also introduced. We show that this model provides a quantitative rationale for the observed hump-shaped relationship between inflation and capital accumulation. (Copyright: Elsevier)

Suggested Citation

  • Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 295-316, April.
  • Handle: RePEc:red:issued:08-7
    DOI: 10.1016/j.red.2009.05.001
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    More about this item

    Keywords

    Monetary policy; Incomplete markets; Borrowing constraints;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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