Monetary policy with Heterogeneous Agents and Borrowing Constraints

Review of Economic Dynamics, 2010, vol. 13, issue 2, 295-316

Abstract: We show that the long-run neutrality of inflation on capital accumulation obtained in complete market models no longer holds when households face binding credit constraints. Borrowing-constrained households are not able to rebalance their financial portfolio when inflation varies, and thus adjust their money holdings differently compared to unconstrained households. This heterogeneity leads to a new precautionary savings motive, which implies that inflation increases capital accumulation. We quantify the importance of this new channel in an incomplete market model where the traditional redistributive effects of inflation are also introduced. We show that this model provides a quantitative rationale for the observed hump-shaped relationship between inflation and capital accumulation. (Copyright: Elsevier)

Keywords: Monetary policy; Incomplete markets; Borrowing constraints (search for similar items in EconPapers)
JEL-codes: E2 E5 (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (61)

Downloads: (external link)
http://dx.doi.org/10.1016/j.red.2009.05.001
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

Related works:
Working Paper: Monetary Policy with Heterogeneous Agents and Borrowing Constraints (2010)
Working Paper: Monetary Policy with Heterogeneous Agents and Borrowing Constraints (2010)
Software Item: Code files for "Monetary Policy with Heterogeneous Agents and Borrowing Constraints" (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:08-7

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2009.05.001

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().