Limited Asset Markets Participation, Inverted Keynesian Logic And Monetary Policy
- Topics:
- Organization
- Tags:
- Asset,
- Participation,
- Operational Planning,
- Interest Rate,
- Financial Services,
- Financial Planning,
- Finance,
- Business Operations,
- Asset Management,
- University Of Oxford
- Source:
- University of Oxford
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Overview: This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple framework for monetary policy analysis. It is shown that aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation: low enough participation causes an inversion of results dictated by ('Keynesian') conventional wisdom. Namely: The slope of the IS (Information System) curve changes sign, making real interest rate increases be expansionary; The Taylor principle is reversed: in most cases, in order to ensure equilibrium uniqueness the central bank needs to adopt a 'Passive' rule; Optimal welfare-maximizing monetary policy also implies passive policy rule; and An interest rate peg is consistent with a unique rational expectations equilibrium under more restrictive conditions.
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Format: PDF | Size: 488KB | Date: Feb 2005 | Pages: 37
