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Optimal monetary policy and financial stability in a non-Ricardian economy

Author

Listed:
  • Salvatore Nisticò

    (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome and LUISS Guido Carli)

Abstract

This paper develops a model with discontinuous asset market participation, in which all agents are infinitely-lived and non-Ricardian, and where heterogeneity among market participants implies financial-wealth effects on aggregate consumption. Derivation of a welfare-based loss function shows that financial stability arises as an additional and independent target, besides infl ation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and infl ation are optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants in this economy may lead monetary policy to induce substantially higher welfare losses.

Suggested Citation

  • Salvatore Nisticò, 2014. "Optimal monetary policy and financial stability in a non-Ricardian economy," Working Papers 6/14, Sapienza University of Rome, DISS.
    • Handle: RePEc:saq:wpaper:6/14
    as

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    References listed on IDEAS

    as
    1. Giorgio Di Giorgio & Salvatore Nisticò, 2007. "Monetary Policy and Stock Prices in an Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1947-1985, December.
    2. Acemoglu, Daron & Woodford, Michael (ed.), 2012. "NBER Macroeconomics Annual 2011," National Bureau of Economic Research Books, University of Chicago Press, number 9780226002149, July.
    3. Charles T. Carlstrom & Timothy Fuerst, 2007. "Asset Prices, Nominal Rigidities, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(2), pages 256-275, April.
    4. Frank Smets & Raf Wouters, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Research 19, National Bank of Belgium.
    5. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    6. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 32(2), pages 137-150.
    7. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
    8. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    DAMP; Optimal Monetary Policy; Perpetual Youth; Financial Stability; DSGE Model; Asset Prices; LAMP.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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