Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152842
Authors: 
Bilbiie, Florin O.
Year of Publication: 
2004
Series/Report no.: 
ECB Working Paper 408
Abstract: 
When enough agents do not participate in asset markets, the slope of the aggregate demand curve is reversed. Monetary policy should be passive, to ensure equilibrium determinacy and to minimize variations in output and inflation. This paper presents evidence that asset markets participation in the US was limited over the Great Inflation period and the slope of the IS curve had the ’wrong’ sign. Our results may help explain the ’Great Inflation’ and give optimism for FED policy. If the economy was characterized by a relatively higher degree of financial frictions over that period: (i) policy implied a determinate equilibrium and ruled out sunspot fluctuations; (ii) policy was closer to optimal than conventional wisdom dictates; (iii) responses and variability of macroeconomic variables conditional upon fundamental shocks are close to their estimated counterparts for a wide range of reasonable parameterizations. Notably, ’cost-push’ shocks are enough to generate a Great Inflation.
Subjects: 
limited asset markets participation
monetary policy rules
real (in)determinacy
Taylor Principle
the Great Inflation
JEL: 
E31
E32
E44
E58
E65
Document Type: 
Working Paper

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