This paper investigates the effects of limited asset market participation on the effectiveness of monetary policy in a New Keynesian Dynamic Stochastic General Equilibrium model. Although an increase in consumers who cannot access financial markets reduces the effects of interest rate policies through consumption inter-temporal allocation (neoclassical or permanent income effect), we find an opposite result: monetary policy becomes more effective as the degree of financial market participation falls. The reason has a very Keynesian flavor.
Effectiveness of Monetary Policy and Limited Asset Market Participation
ROSSI, LORENZA
2007-01-01
Abstract
This paper investigates the effects of limited asset market participation on the effectiveness of monetary policy in a New Keynesian Dynamic Stochastic General Equilibrium model. Although an increase in consumers who cannot access financial markets reduces the effects of interest rate policies through consumption inter-temporal allocation (neoclassical or permanent income effect), we find an opposite result: monetary policy becomes more effective as the degree of financial market participation falls. The reason has a very Keynesian flavor.File in questo prodotto:
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