LIMITED ASSET MARKET PARTICIPATION, STICKY WAGES, AND MONETARY POLICY

Guido Ascari Y · Andrea Colciago · Lorenza Rossi

38 citations0/0 files storedEconomic Inquiry

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

A small amount of nominal wage stickiness makes limited asset market participation (LAMP) irrelevant for the design of monetary policy. Recent research argues that LAMP could invert the slope of the IS curve in otherwise standard New Keynesian models. This, in turn, implies that optimal monetary policy rules should be passive. We show that the so‐called inverted aggregate demand logic (IADL) relies on nominal wage flexibility. Outside of extreme parameterizations, wage stickiness prevents the inversion of the slope of the IS curve. Hence, LAMP does not generally alter the trade‐offs faced by a welfare maximizing Central Bank, and for this reason it does not fundamentally affect the design of optimal simple rules and optimal monetary policy. (JEL E21, E52)

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References

1983Staggered prices in a utility-maximizing framework 2005Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy 2005INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY 2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*1996Staggered Prices in a Utility-Maximizing Framework 2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 2002An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output 2000Optimal monetary policy with staggered wage and price contracts

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