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Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects
Author(s) -
Bartolomeo Giovanni Di,
Rossi Lorenza
Publication year - 2007
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2007.00056.x
Subject(s) - economics , new keynesian economics , monetary policy , asset (computer security) , consumption (sociology) , dynamic stochastic general equilibrium , financial market , monetary economics , keynesian economics , finance , social science , computer security , sociology , computer science
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.