Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-23T23:09:14.175Z Has data issue: false hasContentIssue false
  • English
  • Français

MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY

Published online by Cambridge University Press:  07 January 2014

Giorgio Motta  and
Patrizio Tirelli
Giorgio Motta*
Affiliation:
Lancaster University Management School
Patrizio Tirelli
Affiliation:
Università degli Studi di Milano-Bicocca
*
Address correspondence to: Giorgio Motta, Economics Department, Lancaster University Management School, LA1 4YX Lancaster, UK; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

The limited asset-market participation hypothesis has triggered a debate on DSGE models' determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate in the market for interest-bearing securities hold money. In this case, endogenous monetary transfers between the two groups make it possible to smooth consumption differences, and the model is determinate, provided that the non-negativity constraint on individual money holdings is satisfied.

Keywords

Rule-of-Thumb ConsumersDynamic Stochastic General EquilibriumDeterminacyLimited Asset-Market ParticipationMoney Targeting
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 2 , March 2015 , pp. 288 - 310
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ascari, Guido, Colciago, Andrea, and Rossi, Lorenza (2011) Limited Asset Market Participation: Does It Really Matter for Monetary Policy? Research discussion paper 15-2011, Bank of Finland.Google Scholar
Bilbiie, Florin O. (2008) Limited asset markets participation, monetary policy and (inverted) aggregate demand logic. Journal of Economic Theory 140 (1), 162–196.CrossRefGoogle Scholar
Bilbiie, Florin O., Meier, André, and Müller, Gernot J. (2008) What accounts for the changes in U.S. fiscal policy transmission? Journal of Money, Credit and Banking 40 (7), 1439–1470.CrossRefGoogle Scholar
Bilbiie, Florin O. and Straub, Roland (2012) Changes in the output Euler equation and asset markets participation. Journal of Economic Dynamics and Control 36 (11), 1659–1672.CrossRefGoogle Scholar
Bilbiie, Florin O. and Straub, Roland (2013) Asset market participation, monetary policy rules and the great inflation. Review of Economics and Statistics 95 (2), 377–392.CrossRefGoogle Scholar
Bils, Mark and Klenow, Peter J. (2004) “Some evidence on the importance of sticky prices. Journal of Political Economy 112 (5), 947–985.CrossRefGoogle Scholar
Campbell, John Y. and Mankiw, Gregory N. (1989) Consumption, Income, and Interest Rates: Reinterpreting the Time-Series Evidence. NBER Macroeconomics Annual.CrossRefGoogle Scholar
Choi, Hyung S. (2011) Monetary policy and endowment risk in a limited participation model. Economic Inquiry 49 (1), 89–93.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.Google Scholar
Coenen, Günter and Straub, Roland (2005) Does government spending crowd in private consumption? Theory and empirical evidence for the Euro area. International Finance 8 (3), 435–470.CrossRefGoogle Scholar
Colciago, Andrea (2011) Rule of thumb consumers meet sticky wages. Journal of Money, Credit and Banking 43 (2), 325–353.CrossRefGoogle Scholar
Erceg, Christopher J., Guerrieri, Luca, and Gust, Christopher (2006) SIGMA: A new open economy model for policy analysis. International Journal of Central Banking 2 (1), 1–50.Google Scholar
Felippa, Carlos A. and Perk, K.C. (2004) Synthesis Tools for Structural Dynamics and Partitioned Analysis of Coupled Systems. Keynote paper in Multi-Physics and Multi-Scale Computer Models in Nonlinear Analysis and Optimal Design of Engineering Structures under Extreme Conditions. In Ibrahimbegovic, A. and Brank, B. (eds.), Proceedings NATO-ARW PST ARW980268, Ljubliana, Slovenia, pp. 50–110.Google Scholar
Forni, Lorenzo, Monteforte, Libero, and Sessa, Luca (2009) The general equilibrium effects of fiscal policy: Estimates for the Euro area. Journal of Public Economics 93 (3–4), 559–585.Google Scholar
Galí, Jordi, López-Salido, J. David, and és, Javier Vall (2004) Rule-of-Thumb Consumers and the Design of Interest Rate Rules. NBER working paper 10392, National Bureau of Economic Research.CrossRefGoogle Scholar
Galí, Jordi, López-Salido, J. David, and és, Javier Vall (2007) Understanding the effects of government spending on consumption Journal of the European Economic Association 5 (1), 227–270.CrossRefGoogle Scholar
Jacoviello, Matteo (2004) Consumption, house prices, and collateral constraints: A structural econometric analysis, Journal of Housing Economics 13 (4), 304–320.CrossRefGoogle Scholar
Mankiw, N. Gregory (2000) The savers-spenders theory of fiscal policy. American Economic Review 90 (2), 120–125.CrossRefGoogle Scholar
Motta, Giorgio and Tirelli, Patrizio (2012) Optimal simple monetary and fiscal rules under limited asset market participation. Journal of Money, Credit and Banking, 44 (7), 1351–1374.CrossRefGoogle Scholar
OECD (2009) The Financial Crisis. Reform and Exit Strategies. Available at http://www.oecd.org/document/20/0,3343,en_2649_34813_43726868_1_1_1_37467,00.html.Google Scholar
Rossi, Raffaele (2011) Designing monetary and fiscal policy rules in a New Keynesian model with rule-of-thumb consumers. Macroeconomic Dynamics. doi:10.1017/S1365100512000430.CrossRefGoogle Scholar
Smets, Frank and Wouters, Raf (2003) An estimated dynamic stochastic general equilibrium model of the Euro area. Journal of the European Economic Association 1 (5), 1123–1175.CrossRefGoogle Scholar
Smets, Frank and Wouters, Rafael (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586–606.CrossRefGoogle Scholar