Money Targeting, Heterogeneous Agents and Dynamic Instability

Giorgio Motta and Patrizio Tirelli

No 193, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: Christiano et al. (2005) have shown that a standard medium-sized DSGE model can successfully replicate VAR IRFs to a money supply shock. This important result vanishes under limited asset market partic- ipation. Further, even a moderate fraction of constrained consumers is su¢ cient to dampen the real interest rate reaction to inflation, thereby causeing instability. The introduction of a simple fiscal automatic sta- bilizer restores stability and improves the dynamic performance of the model.

Keywords: Rule of Thumb Consumers; DSGE; Determinacy; Limited Asset; Market Participation (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-07, Revised 2010-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: MONEY TARGETING, HETEROGENEOUS AGENTS, AND DYNAMIC INSTABILITY (2015)
Working Paper: Money Targeting, Heterogeneous Agents and Dynamic Instability (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:193

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