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Limited asset market participation: does it really matter for monetary policy?

  • Ascari, Guido

    ()

    (Department of Economics and Quantitative Methods, University of Pavia)

  • Colciago , Andrea

    (University of Milano-Bicocca. Department of Economics)

  • Rossi, Lorenza

    (University of Pavia)

We study the design of monetary policy in an economy characterized by staggered wage and price contracts together with limited asset market participation (LAMP). Contrary to previous results, we find that once nominal wage stickiness, an incontrovertible empirical fact, is considered: i) the Taylor Principle is restored as a necessary condition for equilibrium determinacy for any empirically plausible degree of LAMP; ii) the implications of LAMP for the design of optimal monetary policy are minor; iii) optimal interest rate rules become active no matter the degree of asset market participation. For these reasons we argue that LAMP is not particularly important for monetary policy.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1115.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 15/2011.

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Length: 59 pages
Date of creation: 31 May 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_015
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. Jordi Gali & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data?," NBER Working Papers 10636, National Bureau of Economic Research, Inc.
  2. Giovanni Di Bartolomeo & Lorenza Rossi, 2005. "Efficacy of Monetary Policy and Limited Asset Market Participation," Macroeconomics 0508027, EconWPA.
  3. Giovanni Di Bartolomeo & Lorenza Rossi & Massimiliano Tancioni, 2007. "Monetary Policy under Rule-of-Thumb Consumers and External Habits," Money Macro and Finance (MMF) Research Group Conference 2006 1, Money Macro and Finance Research Group.
  4. Galí, Jordi & Rabanal, Pau, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Post-War US Data?," CEPR Discussion Papers 4522, C.E.P.R. Discussion Papers.
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