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Efficacy of Monetary Policy and Limited Asset Market Participation

  • Giovanni Di Bartolomeo

    (Università di Roma La Sapienza)

  • Lorenza Rossi

    (Università di Roma Tor Vergata)

A common wisdom argues that limited asset market participation reduces the efficacy of monetary policy. This paper investigates this issue in the context of the New Keynesian dynamic stochastic general equilibrium models. Despite limited participation actually reduces effects of interest rate policies by reducing the effect on inter-temporal allocation of consumption, we find an opposite result. Monetary policy becomes more effective as long as the share of agents who cannot access to the financial market increases. The reason has a very Keynesian flavor.

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Paper provided by EconWPA in its series Macroeconomics with number 0508027.

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Length: 9 pages
Date of creation: 25 Aug 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0508027
Note: Type of Document - pdf; pages: 9
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  1. V. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2004. " Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints," CDMA Conference Paper Series 0402, Centre for Dynamic Macroeconomic Analysis.
  2. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," American Economic Review, American Economic Association, vol. 90(2), pages 120-125, May.
  3. Yamin Ahmad, 2002. "Money Market Rates and Implied CCAPM Rates: Some International Evidence," Working Papers gueconwpa~02-02-06, Georgetown University, Department of Economics.
  4. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
  5. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," NBER Working Papers 10392, National Bureau of Economic Research, Inc.
  6. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  7. Jeffery D. Amato & Thomas Laubach, 2002. "Rule-of-thumb behaviour and monetary policy," Finance and Economics Discussion Series 2002-5, Board of Governors of the Federal Reserve System (U.S.).
  8. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  9. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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