Journal article
CONSUMPTION EXTERNALITIES AND MONETARY POLICY WITH LIMITED ASSET MARKET PARTICIPATION
Economic inquiry, v 55(1), pp 601-623
01 Jan 2017
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
This article explores the interaction between consumption externalities and limited asset market participation (LAMP) in the standard New-Keynesian model. We assess the performance of simple Taylor-type interest rate rules with respect to (a) equilibrium determinacy, (b) the model's ability to simultaneously generate output and inflation volatility similar to the pre-Volcker era, and (c) the model's response to a technology shock. We find that when individual preferences are affected by average household consumption (Aggregate Consumption Externality), stronger externalities increase the range of LAMP for which multiple equilibria arise even if the policy rule satisfies the Taylor principle. The interaction of LAMP and externalities can generate vast inflation/output relative volatility in line with the one observed in the data in the 1970s. According to our analysis, consumption externalities also affect the responses of endogenous variables to total factor productivity shocks. (JEL E4, E5)
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Details
- Title
- CONSUMPTION EXTERNALITIES AND MONETARY POLICY WITH LIMITED ASSET MARKET PARTICIPATION
- Creators
- Marco Airaudo - Drexel UniversityLuca Bossi - Senior Lecturer, Department of Economics University of Pennsylvania Philadelphia PA 19104-6297
- Publication Details
- Economic inquiry, v 55(1), pp 601-623
- Publisher
- Wiley
- Number of pages
- 23
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000388504000035
- Scopus ID
- 2-s2.0-84977072749
- Other Identifier
- 991019168161604721
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- Collaboration types
- Domestic collaboration
- Web of Science research areas
- Economics