IDEAS home Printed from https://ideas.repec.org/p/ecm/wc2000/0796.html
   My bibliography  Save this paper

Optimal Monetary Policy in an Economy with Incomplete Markets and Idiosyncratic Shocks

Author

Listed:
  • Ahmet Akyol

    (University of Iowa)

Abstract

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.

Suggested Citation

  • Ahmet Akyol, 2000. "Optimal Monetary Policy in an Economy with Incomplete Markets and Idiosyncratic Shocks," Econometric Society World Congress 2000 Contributed Papers 0796, Econometric Society.
  • Handle: RePEc:ecm:wc2000:0796
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/RePEc/es2000/0796.pdf
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Claudio Campanale & Carolina Fugazza & Francisco Gomes, 2012. "Life-Cycle Portfolio Choice with Liquid and Illiquid Financial Assets," Carlo Alberto Notebooks 269, Collegio Carlo Alberto.
    2. Nils Gornemann & Keith Kuester & Makoto Nakajima, 2012. "Monetary policy with heterogeneous agents," Working Papers 12-21, Federal Reserve Bank of Philadelphia.
    3. Francesco Lippi & Nicholas Trachter, 2011. "The optimum Quantity of Money with Borrowing Constraints," EIEF Working Papers Series 1108, Einaudi Institute for Economics and Finance (EIEF), revised Apr 2011.
    4. Lizarazo, Sandra & Da-Rocha, Jose-Maria, 2011. "Optimal monetary policy and default," MPRA Paper 31931, University Library of Munich, Germany.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.