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Limited Asset Market Participation and the Optimal Fiscal and Monetary Policies

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  • Lorenzo Menna
  • Patrizio Tirelli

Abstract

In the workhorse DSGE model, the optimal steady state inflation rate is near to zero or slightly negative and inflation is almost completely stabilized along the business cycle (Schmitt-Grohè and Uribe, 2011). We reconsider the issue, allowing for agent heterogeneity in the access to the market for interest bearing assets. We show that inflation reduces inequality and that LAMP can justify relatively high optimal inflation rates. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is well above 2%. The optimal response to shocks is also a¤ected. Rather than using public debt to smooth tax distortions, the Ramsey planner front loads tax rates and reduces public debt variations in order to limit the redistributive e¤ects of debt service payments.

Suggested Citation

  • Lorenzo Menna & Patrizio Tirelli, 2014. "Limited Asset Market Participation and the Optimal Fiscal and Monetary Policies," Working Papers 284, University of Milano-Bicocca, Department of Economics, revised Oct 2014.
  • Handle: RePEc:mib:wpaper:284
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    References listed on IDEAS

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    1. Limited Asset Market Participation and the Optimal Fiscal and Monetary Policies
      by Christian Zimmermann in NEP-DGE blog on 2014-11-11 23:28:10

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    Cited by:

    1. Horvath, Roman & Kaszab, Lorant & Marsal, Ales, 2021. "Equity premium and monetary policy in a model with limited asset market participation," Economic Modelling, Elsevier, vol. 95(C), pages 430-440.

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    More about this item

    Keywords

    trend ination; monetary and scal policy; Ramsey plan; Limited Asset Market Participation.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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