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Limited Participation, Capital Accumulation and Optimal Monetary Policy

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  • Xavier Ragot

    (Observatoire français des conjonctures économiques)

Abstract

Motivated by recent empirical findings on money demand, the paper presents a general equilibrium model where agents have limited participation in financial markets and use money to smooth consumption. In such setup, investment is not optimal because only a fraction of households participate in financial markets in each period. Optimal monetary policy substantially increases welfare by changing investment decisions over the business cycle, but adverse redistributive effects limit the scope for an active monetary policy. Recent developments in the heterogeneous-agents literature are used to develop a tractable framework with aggregate shocks, where optimal monetary policy can be analyzed.

Suggested Citation

  • Xavier Ragot, 2018. "Limited Participation, Capital Accumulation and Optimal Monetary Policy," Sciences Po publications 2018-12, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc
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    References listed on IDEAS

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    1. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
    2. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
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    5. Edouard Challe & Julien Matheron & Xavier Ragot & Juan F. Rubio‐Ramirez, 2017. "Precautionary saving and aggregate demand," Quantitative Economics, Econometric Society, vol. 8(2), pages 435-478, July.
    6. Greg Kaplan & Giovanni L. Violante, 2014. "A Model of the Consumption Response to Fiscal Stimulus Payments," Econometrica, Econometric Society, vol. 82(4), pages 1199-1239, July.
    7. Lippi, Francesco & Ragni, Stefania & Trachter, Nicholas, 2015. "Optimal monetary policy with heterogeneous money holdings," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 339-368.
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    More about this item

    Keywords

    Limited participation; Incomplete markets; Optimal policy;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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