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MONETARY POLICY AND ENDOWMENT RISK IN A LIMITED PARTICIPATION MODEL
Author(s) -
CHOI HYUNG SUN
Publication year - 2011
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2010.00283.x
Subject(s) - economics , endowment , monetary policy , monetary economics , asset (computer security) , consumption (sociology) , government (linguistics) , microeconomics , macroeconomics , social science , philosophy , linguistics , computer security , epistemology , sociology , computer science
A limited participation model is constructed to study the risk‐sharing role of monetary policy. A fraction of households exchange money for interest‐bearing government nominal bonds in the asset market and the government injects money through open market operations. In equilibrium, money is nonneutral and monetary policy redistributes consumption across households. Without idiosyncratic endowment risk, monetary policy becomes a perfect risk‐sharing tool, but with idiosyncratic endowment risk, it is not. The Friedman rule is not optimal in general. ( JEL E4, E5)