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Kryvtsov, Oleksiy
Shukayev, Malik
Ueberfeldt, Alexander
Year of Publication: 
Series/Report no.: 
Bank of Canada Working Paper 2007,26
This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy via the effect of expected inflation on real returns of nominal bonds. The equilibrium under optimal monetary policy is characterized by positive average inflation and a nonstationary price level. In an application a key finding is that optimal monetary policy combines features of inflation and price-level targeting.
Monetary policy framework
Document Type: 
Working Paper
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