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Money targeting, heterogeneous agents, and dynamic instability

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>03/2015
<mark>Journal</mark>Macroeconomic Dynamics
Issue number2
Volume19
Number of pages23
Pages (from-to)288-310
Publication statusPublished
Early online date7/01/14
Original languageEnglish

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.