OPTIMAL MONETARY POLICY AND FINANCIAL STABILITY IN A NON‐RICARDIAN ECONOMY | Zendy

Nisticò Salvatore | Zendy

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OPTIMAL MONETARY POLICY AND FINANCIAL STABILITY IN A NON‐RICARDIAN ECONOMY

Author(s) -

Nisticò Salvatore

Publication year - 2016

Publication title -

journal of the european economic association

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.792

H-Index - 93

eISSN - 1542-4774

pISSN - 1542-4766

DOI - 10.1111/jeea.12182

Subject(s) - economics , monetary economics , inflation (cosmology) , consumption (sociology) , monetary policy , welfare , asset (computer security) , discretion , financial market , stabilization policy , aggregate demand , financial stability , macroeconomics , finance , market economy , social science , physics , computer security , sociology , theoretical physics , computer science , law , political science , financial system

I present a model with discontinuous asset‐market participation (DAMP), where all agents are non‐Ricardian, and where heterogeneity among market participants implies financial‐wealth effects on aggregate consumption. The implied welfare criterion shows that financial stability arises as an additional and independent target, besides inflation and output stability. Evaluation of optimal policy under discretion and commitment reveals that price stability may no longer be optimal, even absent inefficient supply shocks: some fluctuations in output and inflation may be optimal as long as they reduce financial instability. Ignoring the heterogeneity among market participants may lead monetary policy to induce substantially higher welfare losses.

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