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Monetary policy with Heterogeneous Agents and Borrowing Constraints

  • Yann Algan

    (Paris School of Economics)

  • Xavier Ragot

    (Banque de France)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2009.05.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 2 (April)
Pages: 295-316

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Handle: RePEc:red:issued:08-7
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  1. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers gueconwpa~03-03-19, Georgetown University, Department of Economics.
  2. Burkhard Heer; Alfred Maussner, 2005. "Distributional Effects of Monetary Policies in a New Neoclassical Model with Progressive Income Taxation," Computing in Economics and Finance 2005 12, Society for Computational Economics.
  3. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
  4. Edward N. Wolff, 2007. "Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze," Economics Working Paper Archive wp_502, Levy Economics Institute.
  5. Burkhard Heer, 2004. "Overlapping Generations Models (GAUSS)," QM&RBC Codes 138, Quantitative Macroeconomics & Real Business Cycles.
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