Optimal Monetary Policy with Heterogeneous Agents (Updated September 2019)
71 Pages Posted: 20 Oct 2016 Last revised: 30 Oct 2019
Date Written: October 29, 2019
We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal claims and costly inflation. Our model features two prominent redistributive channels of monetary policy: the classic Fisherian channel, and unhedged interest rate exposure (URE). The former introduces a “redistributive inflationary bias”, stemming from the fact that debtors (who benefit from inflation) have a higher marginal utility than creditors. This bias is counteracted over time by a disinflationary motive: a commitment to low future inflation raises bond prices, benefiting bond-issuing households (i.e. those with negative URE), who also have a higher marginal utility than bond-purchasing ones. The result is optimal inflation front-loading. Under certain conditions, both motives cancel out asymptotically and optimal long-run inflation is zero. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-à-vis a zero inflation policy.
Keywords: optimal monetary policy, incomplete markets, Gâteaux derivative, nominal debt, inflation, redistributive effects, continuous time
JEL Classification: E5, E62, F34
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