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Monetary Policy with Heterogeneous Households and Imperfect Risk-Sharing

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  • Jae Won Lee

    (Seoul National University)

Abstract

This paper considers a sticky-price model with heterogeneous households and financial frictions. Financial frictions lead to imperfect risk-sharing among households with idiosyncratic labor incomes. I study implications of imperfect risk-sharing for optimal monetary policy by documenting its impacts on the monetary transmission mechanism, the inflation-output tradeoff faced by the central bank, the policy objective function, and the resulting targeting rule. The main finding is that while the central bank continues to have the conventional dual mandate -- the output gap and inflation stabilization -- it should place a greater weight on the later as the degree of financial frictions increases because price stability provides the additional benefit of reducing undesired consumption dispersion. (Copyright: Elsevier)

Suggested Citation

  • Jae Won Lee, 2014. "Monetary Policy with Heterogeneous Households and Imperfect Risk-Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 505-522, July.
    • Handle: RePEc:red:issued:11-1
    DOI: 10.1016/j.red.2013.09.002
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    Cited by:

    1. Seula Kim & Jae Won Lee, 2020. "Sectoral Heterogeneity in Nominal Rigidities in Korea: Implications for Monetary Policy," Korean Economic Review, Korean Economic Association, vol. 36, pages 59-99.
    2. Villarreal, Francisco G., 2014. "Monetary Policy and Inequality in Mexico," MPRA Paper 57074, University Library of Munich, Germany.
    3. Karen Davtyan, 2016. "“Income Inequality and Monetary Policy: An Analysis on the Long Run Relation”," AQR Working Papers 201604, University of Barcelona, Regional Quantitative Analysis Group, revised Apr 2016.
    4. Karen Davtyan, 2016. "“Income Inequality and Monetary Policy: An analysis on the Long Run Relation”," IREA Working Papers 201604, University of Barcelona, Research Institute of Applied Economics, revised Apr 2016.
    5. Maciej Ryczkowski, 2016. "Poland as an inflation nutter:The story of successful output stabilization," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 34(2), pages 363-392.

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    More about this item

    Keywords

    Monetary policy; Heterogeneous households; Risk-sharing; Inflation targeting;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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