Optimal Monetary Policy in an Economy with Incomplete Markets and Idiosyncratic Shocks
This study investigates an incomplete markets economy in which the saving behavior of a continuum of infinitely lived agents is influenced by precautionary saving motives and borrowing constraints. Two types of assets (interest bearing IOUs and money) enhance the liquidity of agents by providing an additional means of smoothing consumption and by effectively loosening borrowing constraints. Money is valued because of a timing friction in the bond market. In particular, the bond market closes before agents observe their idiosyncratic productivity shock. High inflation rates will transfer resources from agents with high endowments to those holding bonds which can increase welfare. However, in an inflationary environment, agents economize on money holdings, causing a reduction in welfare. Furthermore, different monetary growth rates will imply different seigniorage revenues for government. The level of seigniorage revenues will determine the interest rate on government bonds, and the effective borrowing constraint. This study quantitatively examines the welfare implications of different monetary growth rates. Initial results indicate that higher inflation rates increase welfare.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Per Krusell & Anthony A. Smith, Jr., .
"On the Welfare Effects of Eliminating Business Cycles,"
GSIA Working Papers
243, Carnegie Mellon University, Tepper School of Business.
- Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0796. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.