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| Title: | | Monetary policy with heterogeneous households and financial frictions  |
| 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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