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Limited Asset Market Participation, Monetary Policy and (Inverted) Aggregate Demand Logic

Listed author(s):
  • Florin Bilbiie

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne)

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While 'moderate' participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the 'IS' curve changes sign, the 'Taylor principle' is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the 'Great Inflation' period.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00622865.

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Date of creation: 2008
Publication status: Published in Journal of Economic Theory, Elsevier, 2008, 140 (1), pp.162-196. <10.1016/j.jet.2007.07.008>
Handle: RePEc:hal:cesptp:hal-00622865
DOI: 10.1016/j.jet.2007.07.008
Note: View the original document on HAL open archive server: https://hal-paris1.archives-ouvertes.fr/hal-00622865
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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