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Limited Participation, Capital Accumulation and Optimal Monetary Policy

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  • Xavier Ragot

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

Motivated by recent empirical findings on money demand, the paper presents a general equilibrium model where agents have limited participation in financial markets and use money to smooth consumption. In such setup, investment is not optimal because only a fraction of households participate in financial markets in each period. Optimal monetary policy substantially increases welfare by changing investment decisions over the business cycle, but adverse redistributive effects limit the scope for an active monetary policy. Recent developments in the heterogeneous-agents literature are used to develop a tractable framework with aggregate shocks, where optimal monetary policy can be analyzed.

Suggested Citation

  • Xavier Ragot, 2018. "Limited Participation, Capital Accumulation and Optimal Monetary Policy," SciencePo Working papers hal-03444395, HAL.
    • Handle: RePEc:hal:wpspec:hal-03444395
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03444395
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    More about this item

    Keywords

    Limited participation; Incomplete markets; Optimal policy;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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