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Monetary policy with heterogenous agents and credit constraints

Author

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  • Yann Algan

    () (PJSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, OEP - Laboratoire Organisation et Efficacité de la Production - UPEM - Université Paris-Est Marne-la-Vallée)

  • Xavier Ragot

    () (PJSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper analyzes the long-run effect of monetary policy when credit constraints are taken into account. This analysis is carried on in a heterogeneous agents framework in which infinitely lived agents can partially self-insure against income risks by using both financial assets and real balences. First we show theoretically that financial borrowing constraints give rise to an heterogeneity in money demand, leading to a real effect of inflation. Secondly, we show that inflation has a quantitative positive impact on output and consumption in economies which closely match the wealth distribution of the United States. Thirdly, we find that the average welfare cost of inflation is much smaller compared to a complete market economy, and that inflation induces important redistributive effects across households.

Suggested Citation

  • Yann Algan & Xavier Ragot, 2005. "Monetary policy with heterogenous agents and credit constraints," PSE Working Papers halshs-00590565, HAL.
  • Handle: RePEc:hal:psewpa:halshs-00590565
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00590565
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    monetary policy; credit constraints; incomplete markets; welfare;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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