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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://dipeco.economia.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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  1. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," International Finance, Wiley Blackwell, vol. 8(3), pages 435-470, December.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  3. Altig, David E & Christiano, Lawrence J. & Eichenbaum, Martin & Lindé, Jesper, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," CEPR Discussion Papers 4858, C.E.P.R. Discussion Papers.
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  5. Colciago, Andrea, 2005. "Rule of Thumb Consumers Meet Sticky Wages," MPRA Paper 3275, University Library of Munich, Germany, revised 27 Apr 2007.
  6. Iacoviello, Matteo, 2004. "Consumption, House Prices and Collateral Constraints: A Structural Econometric Analysis," 2004 Meeting Papers 207b, Society for Economic Dynamics.
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  8. Hyung Sun Choi, 2011. "Monetary Policy And Endowment Risk In A Limited Participation Model," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 89-93, 01.
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  10. Florin O. Bilbiie & André Meier & Gernot J. Müller, 2008. "What Accounts for the Changes in U.S. Fiscal Policy Transmission?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1439-1470, October.
  11. Ascari, Guido & Colciago , Andrea & Rossi, Lorenza, 2011. "Limited asset market participation: does it really matter for monetary policy?," Research Discussion Papers 15/2011, Bank of Finland.
  12. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  13. Rafael Domenech & Javier Andres & Antonio Fatas, 2006. "The Stabilizing Role of Government Size," Working Papers 0603, International Economics Institute, University of Valencia, revised Jan 2007.
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  15. 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.
  16. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  17. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the U.S. Business Cycle," NBER Working Papers 10724, National Bureau of Economic Research, Inc.
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  20. repec:fth:harver:1435 is not listed on IDEAS
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