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Savings, asset scarcity, and monetary policy

Altermatt, Lukas (2019) 'Savings, asset scarcity, and monetary policy.' Journal of Economic Theory, 182. 329 - 359. ISSN 0022-0531

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Abstract

This paper analyzes optimal monetary policy regarding asset markets in a model where money and savings are essential and asset markets matter. The model is able to explain why different regimes for the correlation of real interest rates and stock price-dividend ratios exist, and offers two explanations why the correlation vanished after 2007: A decrease in inflation or changes in the supply of risky and safe assets. The results on optimal policy show that away from the Friedman rule, fiscal policy can improve welfare by increasing the amount of outstanding government debt. If the fiscal authority is not willing or able to increase debt, the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks.

Item Type: Article
Uncontrolled Keywords: New monetarism, Overlapping generations, Zero lower bound, Optimal stabilization
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 15 Jul 2020 13:09
Last Modified: 18 Oct 2020 01:00
URI: http://repository.essex.ac.uk/id/eprint/28092

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