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MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY

Published online by Cambridge University Press:  07 January 2014

Giorgio Motta  and
Patrizio Tirelli
Giorgio Motta*
Affiliation:
Lancaster University Management School
Patrizio Tirelli
Affiliation:
Università degli Studi di Milano-Bicocca
*
Address correspondence to: Giorgio Motta, Economics Department, Lancaster University Management School, LA1 4YX Lancaster, UK; e-mail: g.motta@lancaster.ac.uk.
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Abstract

The limited asset-market participation hypothesis has triggered a debate on DSGE models' determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate in the market for interest-bearing securities hold money. In this case, endogenous monetary transfers between the two groups make it possible to smooth consumption differences, and the model is determinate, provided that the non-negativity constraint on individual money holdings is satisfied.

Keywords

Rule-of-Thumb ConsumersDynamic Stochastic General EquilibriumDeterminacyLimited Asset-Market ParticipationMoney Targeting
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 2 , March 2015 , pp. 288 - 310
Copyright
Copyright © Cambridge University Press 2014 

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