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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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    Cited by:

    1. Miller, Marcus & Zhang, Lei, 2014. "Macro coordination: Forward Guidance as ‘cheap talk’?," CEPR Discussion Papers 9975, C.E.P.R. Discussion Papers.
    2. Yann Algan & Olivier Allais & Edouard Challe & Xavier Ragot, 2012. "Monetary Shocks Under Incomplete Markets," Sciences Po publications info:hdl:2441/1j0a1p4ifa9, Sciences Po.
    3. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2015. "The Welfare Cost of Inflation Risk Under Imperfect Insurance," Working Papers hal-01169656, HAL.
    4. Ragot, Xavier, 2014. "The case for a financial approach to money demand," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 94-107.
    5. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    6. Bilbiie, Florin Ovidiu & Ragot, Xavier, 2017. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," CEPR Discussion Papers 11814, C.E.P.R. Discussion Papers.
    7. Xavier Ragot, 2008. "The case for a financial approach to money demand," Working Papers halshs-00586066, HAL.
    8. Senbeta, Sisay, 2011. "How applicable are the new keynesian DSGE models to a typical low-income economy?," MPRA Paper 30931, University Library of Munich, Germany.
    9. Villarreal, Francisco G., 2014. "Financial Services and Household Inequality in Mexico," MPRA Paper 57075, University Library of Munich, Germany.
    10. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance & Xavier Ragot, 2015. "The redistributive effects of QE," Sciences Po publications info:hdl:2441/16fo245k6a8, Sciences Po.
    11. Sunel, Enes, 2012. "Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents," MPRA Paper 39690, University Library of Munich, Germany.
    12. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2015. "The Welfare Cost Of Inflation Risk Under Imperfect Insurance," Working Papers hal-01157168, HAL.
    13. Lizarazo, Sandra & Da-Rocha, Jose-Maria, 2011. "Optimal monetary policy and default," MPRA Paper 31931, University Library of Munich, Germany.
    14. Andreas Schabert, 2017. "Welfare-Enhancing Distributional Effects of Central Bank Asset Purchases," Working Paper Series in Economics 94, University of Cologne, Department of Economics.

    More about this item

    Keywords

    Monetary policy; Incomplete markets; Borrowing constraints;

    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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