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Money Targeting, Heterogeneous Agents and Dynamic Instability

  • Giorgio Motta
  • Patrizio Tirelli

Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest-bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption differences and the model is determinate provided that the non-negativity constraint on individual money holdings is satisfied.

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File URL: http://dems.unimib.it/repec/pdf/mibwpaper257.pdf
File Function: First version, 2013
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 257.

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Length: 37
Date of creation: Oct 2013
Date of revision: Oct 2013
Handle: RePEc:mib:wpaper:257
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