Money targeting, heterogeneous agents, and dynamic instability

Motta, Giorgio and Tirelli, Patrizio (2015) Money targeting, heterogeneous agents, and dynamic instability. Macroeconomic Dynamics, 19 (2). pp. 288-310. ISSN 1365-1005

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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.

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Journal Article
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Macroeconomic Dynamics
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11 Mar 2014 15:01
Last Modified:
22 Nov 2022 00:44