Limited Asset Market Participation: Does it Really Matter for Monetary Policy?

Ascari, Guido; Colciago, Andrea; Rossi, Lorenza

doi:10.2139/ssrn.1948412

Limited Asset Market Participation: Does it Really Matter for Monetary Policy?

Bank of Finland Research Discussion Paper No. 15/2011

59 Pages Posted: 24 Oct 2011

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Lorenza Rossi

University of Rome Tor Vergata - Faculty of Economics; National Institute of Statistics (Istat)

Date Written: August 31, 2011

Abstract

We study the design of monetary policy in an economy characterized by staggered wage and price contracts together with limited asset market participation (LAMP). Contrary to previous results, we find that once nominal wage stickiness, an incontrovertible empirical fact, is considered: The Taylor Principle is restored as a necessary condition for equilibrium determinacy for any empirically plausible degree of LAMP; the implications of LAMP for the design of optimal monetary policy are minor; optimal interest rate rules become active no matter the degree of asset market participation. For these reasons we argue that LAMP is not particularly important for monetary policy.

Keywords: optimal monetary policy, sticky wages, non-Ricardian household, determinacy, optimal simple rules

JEL Classification: E50, E52

Suggested Citation: Suggested Citation

Ascari, Guido and Colciago, Andrea and Rossi, Lorenza, Limited Asset Market Participation: Does it Really Matter for Monetary Policy? (August 31, 2011). Bank of Finland Research Discussion Paper No. 15/2011, Available at SSRN: https://ssrn.com/abstract=1948412 or http://dx.doi.org/10.2139/ssrn.1948412