Limited Asset Market Participation, Sticky Wages, and Monetary Policy

20 Pages Posted: 14 May 2020

See all articles by Guido Ascari

Guido Ascari

University of Oxford

Andrea Colciago

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

affiliation not provided to SSRN

Date Written: April 2017

Abstract

A small amount of nominal wage stickiness makes limited asset market participation (LAMP) irrelevant for the design of monetary policy. Recent research argues that LAMP could invert the slope of the IS curve in otherwise standard New Keynesian models. This, in turn, implies that optimal monetary policy rules should be passive. We show that the so‐called inverted aggregate demand logic (IADL) relies on nominal wage flexibility. Outside of extreme parameterizations, wage stickiness prevents the inversion of the slope of the IS curve. Hence, LAMP does not generally alter the trade‐offs faced by a welfare maximizing Central Bank, and for this reason it does not fundamentally affect the design of optimal simple rules and optimal monetary policy.

JEL Classification: E21, E52

Suggested Citation

Ascari, Guido and Colciago, Andrea and Rossi, Lorenza, Limited Asset Market Participation, Sticky Wages, and Monetary Policy (April 2017). Economic Inquiry, Vol. 55, Issue 2, pp. 878-897, 2017, Available at SSRN: https://ssrn.com/abstract=3596376 or http://dx.doi.org/10.1111/ecin.12424

Guido Ascari (Contact Author)

University of Oxford

Andrea Colciago

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Lorenza Rossi

affiliation not provided to SSRN

No Address Available

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