Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Money targeting, heterogeneous agents, and dynamic instability
AU - Motta, Giorgio
AU - Tirelli, Patrizio
PY - 2015/3
Y1 - 2015/3
N2 - 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.
AB - 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.
KW - Rule-of-Thumb Consumers
KW - Dynamic Stochastic General Equilibrium
KW - Determinacy
KW - Limited Asset-Market Participation
KW - Money Targeting
U2 - 10.1017/S1365100513000394
DO - 10.1017/S1365100513000394
M3 - Journal article
VL - 19
SP - 288
EP - 310
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
SN - 1365-1005
IS - 2
ER -