Research Discussion Papers, Bank of Finland
No 15/2011:
Limited asset market participation: does it really matter for monetary policy?
Guido Ascari ()
, Andrea Colciago and Lorenza Rossi
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: i) the Taylor Principle is restored as a necessary condition
for equilibrium determinacy for any empirically plausible degree of LAMP;
ii) the implications of LAMP for the design of optimal monetary policy are
minor; iii) 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; (follow links to similar papers)
JEL-Codes: E50; E52; (follow links to similar papers)
59 pages, May 31, 2011
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