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Monetary Shocks Under Incomplete Markets

Author

Listed:
  • Yann Algan

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Olivier Allais

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Edouard Challe

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Xavier Ragot

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract
This paper provides a systematic quantification of the short-run effects of monetary policy shocks under incomplete markets. Our framework of analysis is the benchmark flexible-price neoclassical growth model with infinitely-lived and ex ante identical individuals, which we augment with i. uninsurable idiosyncratic labor income shocks; ii. a liquidity motive for holding real money balances (via a money-in-the-utility specification); and iii. aggregate shocks to the rate of money growth. We calibrate the model so as to match the historical inflation process as well as the broad features of the cross-sectional distributions of monetary and nonmonetary assets in the US economy. Our main finding is that, even though market incompleteness has a moderate impact on the response of aggregates to the shocks (relative to the complete-market case), this results from composition effects that mask a great deal of cross household redistribution and heterogeneities in individual portfolio adjustments.

Suggested Citation

  • Yann Algan & Olivier Allais & Edouard Challe & Xavier Ragot, 2012. "Monetary Shocks Under Incomplete Markets," Working Papers hal-01169658, HAL.
    • Handle: RePEc:hal:wpaper:hal-01169658
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01169658
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    References listed on IDEAS

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    Cited by:

    1. Vincent Sterk & Silvana Tenreyro, 2013. "The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases," CEP Discussion Papers dp1249, Centre for Economic Performance, LSE.
    2. Sterk, Vincent & Tenreyro, Silvana, 2018. "The transmission of monetary policy through redistributions and durable purchases," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 124-137.

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    More about this item

    Keywords

    Money-in-the-utility; Incomplete Markets; Monetary Shocks;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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