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Optimal monetary policy when asset markets are incomplete

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  • Richard Anton Braun

    (Faculty of Economics, University of Tokyo)

  • Tomoyuki Nakajima

    (Institute of Economic Research, Kyoto University)

Abstract

This paper considers the properties of an optimal monetary policy when households are subject to countercyclical uninsured income shocks. We develop a tractable incompletemarkets model with Calvo price setting. Incomplete markets creates a new distortion and that distortion is large in the sense that the welfare cost of business cycles is large in our model. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.

Suggested Citation

  • Richard Anton Braun & Tomoyuki Nakajima, 2009. "Optimal monetary policy when asset markets are incomplete," CIRJE F-Series CIRJE-F-679, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2009cf679
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    References listed on IDEAS

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