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Monetary Shocks Under Incomplete Markets

Listed author(s):
  • Yann Algan

    ()

    (ECON - Département d'économie - Sciences Po)

  • Olivier Allais

    (ECON - Département d'économie - Sciences Po)

  • Edouard Challe

    (ECON - Département d'économie - Sciences Po)

  • Xavier Ragot

    ()

    (ECON - Département d'économie - Sciences Po)

This paper provides a systematic quantification of the short-run effects of monetary policy shocks under incomplete markets. Our framework of analysis is the benchmark flexible-price neoclassical growth model with infinitely-lived and ex ante identical individuals, which we augment with i. uninsurable idiosyncratic labor income shocks; ii. a liquidity motive for holding real money balances (via a money-in-the-utility specification); and iii. aggregate shocks to the rate of money growth. We calibrate the model so as to match the historical inflation process as well as the broad features of the cross-sectional distributions of monetary and nonmonetary assets in the US economy. Our main finding is that, even though market incompleteness has a moderate impact on the response of aggregates to the shocks (relative to the complete-market case), this results from composition effects that mask a great deal of cross household redistribution and heterogeneities in individual portfolio adjustments.

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Paper provided by HAL in its series Working Papers with number hal-01169658.

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Date of creation: Mar 2012
Handle: RePEc:hal:wpaper:hal-01169658
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-01169658
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  1. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, 05.
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  7. Akyol, Ahmet, 2004. "Optimal monetary policy in an economy with incomplete markets and idiosyncratic risk," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1245-1269, September.
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  9. Jonathan Heathcote, 2005. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 161-188.
  10. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
  11. Heer, Burkhard & Maußner, Alfred, 2012. "The Burden Of Unanticipated Inflation: Analysis Of An Overlapping-Generations Model With Progressive Income Taxation And Staggered Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 16(02), pages 278-308, April.
  12. Ragot, Xavier, 2014. "The case for a financial approach to money demand," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 94-107.
  13. Yann Algan & Xavier Ragot, 2010. "Monetary policy with Heterogeneous Agents and Borrowing Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 295-316, April.
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  16. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  17. Heer, Burkhard & Maußner, Alfred, 2012. "The Burden Of Unanticipated Inflation: Analysis Of An Overlapping-Generations Model With Progressive Income Taxation And Staggered Prices," Macroeconomic Dynamics, Cambridge University Press, vol. 16(02), pages 278-308, April.
  18. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
  19. Holman, Jill A, 1998. "GMM Estimation of a Money-in-the-Utility-Function Model: The Implications of Functional Forms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 679-698, November.
  20. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, July.
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  22. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  23. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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