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On the non-neutrality and optimality of monetary policy when financial markets are incomplete : a macroeconomic perspective

Author

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  • Franck Portier

    (M.A.D. - UP1 - Université Paris 1 Panthéon-Sorbonne, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres)

  • Jean-Marc Tallon

    (M.A.D. - UP1 - Université Paris 1 Panthéon-Sorbonne)

Abstract

We study in this paper a simple model of a two-period economy, with two states of the world in the second period, two agents and one good. Financial markets are incomplete since only inside money is available. We show that outside money, which is introduced in the model through its role as a medium of exchange, is non-neutral, in the sense that it has an effect on the equilibrium allocation. We then discuss whether a monetary policy that would aim at state-independent price levels is desirable. We illustrate that discussion with a few examples. The possible sub-optimality of a constant-across-states inflation rates target for monetary policy is to be contrasted with results from representative agent macroeconomic models.

Suggested Citation

  • Franck Portier & Jean-Marc Tallon, 1995. "On the non-neutrality and optimality of monetary policy when financial markets are incomplete : a macroeconomic perspective," Post-Print halshs-00502530, HAL.
    • Handle: RePEc:hal:journl:halshs-00502530
    DOI: 10.1016/0035-5054(95)90009-8
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    Cited by:

    1. Jean-Marc Tallon, 1995. "Théorie de l'équilibre général avec marchés financiers incomplets," Revue Économique, Programme National Persée, vol. 46(5), pages 1207-1239.

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