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Money Targeting, Heterogeneous Agents and Dynamic Instability

Author

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  • Giorgio Motta
  • Patrizio Tirelli

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Abstract

Christiano et al. (2005) have shown that a standard medium-sized DSGE model can successfully replicate VAR IRFs to a money supply shock. This important result vanishes under limited asset market partic- ipation. Further, even a moderate fraction of constrained consumers is su¢ cient to dampen the real interest rate reaction to inflation, thereby causeing instability. The introduction of a simple fiscal automatic sta- bilizer restores stability and improves the dynamic performance of the model.

Suggested Citation

  • Giorgio Motta & Patrizio Tirelli, 2010. "Money Targeting, Heterogeneous Agents and Dynamic Instability," Working Papers 193, University of Milano-Bicocca, Department of Economics, revised Jul 2010.
  • Handle: RePEc:mib:wpaper:193
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    File URL: http://dems.unimib.it/repec/pdf/mibwpaper193.pdf
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    References listed on IDEAS

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    1. Giorgio Motta & Patrizio Tirelli, 2012. "Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1351-1374, October.
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    7. Florin O. Bilbiie & Roland Straub, 2013. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 377-392, May.
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    22. repec:fth:harver:1435 is not listed on IDEAS
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    Cited by:

    1. Albonico, Alice & Paccagnini, Alessia & Tirelli, Patrizio, 2016. "In search of the Euro area fiscal stance," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 254-264.
    2. Ferrari, Massimo, 2014. "The financial meltdown: a model with endogenous default probability," MPRA Paper 59419, University Library of Munich, Germany.
    3. Beqiraj Elton & Di Bartolomeo Giovanni & Di Pietro Marco, 2016. "Financial crises, limited asset market participation, and banks balance sheet constraints," wp.comunite 00127, Department of Communication, University of Teramo.
    4. Alice Albonico & Alessia Paccagnini & Patrizio Tirelli, 2014. "Estimating a DSGE model with Limited Asset Market Participation for the Euro Area," Working Papers 286, University of Milano-Bicocca, Department of Economics, revised Nov 2014.
    5. repec:eee:ecolet:v:157:y:2017:i:c:p:103-106 is not listed on IDEAS

    More about this item

    Keywords

    Rule of Thumb Consumers; DSGE; Determinacy; Limited Asset; Market Participation;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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