Efficacy of Monetary Policy and Limited Asset Market Participation: Neoclassical vs. Keynesian Effects

6 Pages Posted: 30 Jan 2006

See all articles by Giovanni Di Bartolomeo

Giovanni Di Bartolomeo

Sapienza University of Rome, Department of Economics and Law

Lorenza Rossi

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

Date Written: January 2006

Abstract

This short paper investigates the effects of limited asset market participation on the efficacy of monetary policy in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Although an increase in consumers who cannot access to the financial markets reduces effects of interest rate policies via the consumption inter-temporal allocation (Neoclassical or permanent income effect), we find that an opposite result: monetary policy becomes more effective as the degree of financial markets participation falls. The reason has a very Keynesian flavor.

Keywords: Consumers' heterogeneity, efficacy of monetary policy

JEL Classification: E61, E63

Suggested Citation

Di Bartolomeo, Giovanni and Rossi, Lorenza, Efficacy of Monetary Policy and Limited Asset Market Participation: Neoclassical vs. Keynesian Effects (January 2006). Available at SSRN: https://ssrn.com/abstract=879070 or http://dx.doi.org/10.2139/ssrn.879070

Giovanni Di Bartolomeo (Contact Author)

Sapienza University of Rome, Department of Economics and Law ( email )

via Castro del Laurenziano 9
Roma, 00191
Italy

Lorenza Rossi

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

National Institute of Statistics (Istat)

Via Cesare Balbo 16
00184 Rome, 0185
Italy

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