Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
LIMITED ASSET MARKET PARTICIPATION, STICKY WAGES, AND MONETARY POLICY. / Ascari, G.; Colciago, A.; Rossi, L.
In: Economic Inquiry, Vol. 55, No. 2, 30.04.2017, p. 878-897.Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - LIMITED ASSET MARKET PARTICIPATION, STICKY WAGES, AND MONETARY POLICY
AU - Ascari, G.
AU - Colciago, A.
AU - Rossi, L.
PY - 2017/4/30
Y1 - 2017/4/30
N2 - 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).
AB - 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).
U2 - 10.1111/ecin.12424
DO - 10.1111/ecin.12424
M3 - Journal article
VL - 55
SP - 878
EP - 897
JO - Economic Inquiry
JF - Economic Inquiry
SN - 0095-2583
IS - 2
ER -