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Monetary Policy with Heterogenous Agents and Credit Constraints

  • Yann Algan
  • Xavier Ragot

This paper analyzes the long-run effect of monetary policy when credit constraints are taken into account. This analysis is carried on in a heterogeneous agents framework in which infinitely lived agents can partially self-insure against income risks by using both financial assets and real balences. First we show theoretically that financial borrowing constraints give rise to an heterogeneity in money demand, leading to a real effect of inflation. Secondly, we show that inflation has a quantitative positive impact on output and consumption in economies which closely match the wealth distribution of the United States. Thirdly, we find that the average welfare cost of inflation is much smaller compared to a complete market economy, and that inflation induces important redistributive effects across households.

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File URL: http://spire.sciencespo.fr/hdl:/2441/8805/resources/wp200545.pdf
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Paper provided by Sciences Po in its series Sciences Po publications with number 2005 - 45.

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Date of creation: 2005
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Handle: RePEc:spo:wpmain:info:hdl:2441/8805
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  9. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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  13. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman rule in economies with distorting taxes," Staff Report 158, Federal Reserve Bank of Minneapolis.
  14. Xavier Ragot, 2005. "The real effect of inflation in liquidity constrained models," PSE Working Papers halshs-00590556, HAL.
  15. Stefania Albanesi, 2002. "Inflation and Inequality," Macroeconomics 0201002, EconWPA.
  16. Jonathan Heathcote, 2003. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," Working Papers gueconwpa~03-03-23, Georgetown University, Department of Economics.
  17. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  18. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  19. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-76, April.
  20. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  21. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
  22. Timothy J. Kehoe & David K. Levine, 2000. "Liquidity Constrained vs. Debt Constrained Markets," Levine's Working Paper Archive 14, David K. Levine.
  23. Weil, Philippe, 1991. "Is Money Net Wealth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 37-53, February.
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  26. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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