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Title:Monetary policy with heterogeneous households and financial frictions PDF Logo
Authors:Lee, Jae Won
Issue Date:2010
Series/Report no.:Working Papers, Department of Economics, Rutgers, the State University of New Jersey 2010,02
Abstract:This paper presents and estimates a sticky-price model with heterogenous households and financial frictions. Frictions in state-contingent asset markets lead to imperfect risksharing among households with idiosyncratic labor incomes. I study the impacts of the introduced financial frictions on optimal monetary policy by documenting implications for the central bank's objective function, the equation that characterizes inflation-output gap trade-offers, targeting rules, interest rate rules, and welfare of the economy. Employing the estimated model, the paper argues that the central bank should place a stronger emphasis on stabilizing inflation than it has, and failing to do so can generate nontrivial welfare costs.
Document Type:Working Paper
Appears in Collections:Working Papers, Department of Economics, Rutgers University

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