LIMITED ASSET MARKET PARTICIPATION, STICKY WAGES, AND MONETARY POLICY

Ascari, G. and Colciago, A. and Rossi, L. (2017) LIMITED ASSET MARKET PARTICIPATION, STICKY WAGES, AND MONETARY POLICY. Economic Inquiry, 55 (2). pp. 878-897. ISSN 0095-2583

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Abstract

A small amount of nominal wage stickiness makes limited asset market participation (LAMP) irrelevant for the design of monetary policy. Recent research argues that LAMP could invert the slope of the IS curve in otherwise standard New Keynesian models. This, in turn, implies that optimal monetary policy rules should be passive. We show that the so-called inverted aggregate demand logic (IADL) relies on nominal wage flexibility. Outside of extreme parameterizations, wage stickiness prevents the inversion of the slope of the IS curve. Hence, LAMP does not generally alter the trade-offs faced by a welfare maximizing Central Bank, and for this reason it does not fundamentally affect the design of optimal simple rules and optimal monetary policy. (JEL E21, E52).

Item Type:
Journal Article
Journal or Publication Title:
Economic Inquiry
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
160486
Deposited By:
Deposited On:
08 Oct 2021 13:55
Refereed?:
Yes
Published?:
Published
Last Modified:
09 Oct 2021 05:56