Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153871
Authors: 
Bilbiie, Florin O.
Straub, Roland
Year of Publication: 
2012
Series/Report no.: 
ECB Working Paper 1438
Abstract: 
This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. In an otherwise conventional sticky-price model, standard aggregate demand logic is inverted at low enough asset market participation: interest rate increases become expansionary; passive monetary policy ensures equilibrium determinacy and maximizes welfare. This suggests that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom implies. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation.
Subjects: 
Great Inflation
Great Moderation
limited asset markets participation
passive monetary policy rules
JEL: 
E31
E32
E44
E52
Document Type: 
Working Paper

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