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Money Targeting, Heterogeneous Agents and Dynamic Instability

  • Giorgio Motta
  • Patrizio Tirelli


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.

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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 193.

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Length: 29 pages
Date of creation: Jul 2010
Date of revision: Jul 2010
Handle: RePEc:mib:wpaper:193
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  3. Giorgio Motta & Patrizio Tirelli, 2011. "Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation," Working Papers 204, University of Milano-Bicocca, Department of Economics, revised Mar 2011.
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