scholarly journals Pareto Improving Monetary Policy in Incomplete Markets

2006 ◽  
Author(s):  
Sergio Turner ◽  
Norovsambuu Tumennasan
Keyword(s):  
Monetary Policy ◽  
Incomplete Markets ◽  
Pareto Improving

scholarly journals Understanding HANK: Insights From a PRANK

Econometrica ◽  
2020 ◽  
Vol 88 (3) ◽  
pp. 1113-1158 ◽  
Author(s):  
Sushant Acharya ◽  
Keshav Dogra
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Incomplete Markets ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Income Risk ◽  
Heterogeneous Agent ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model

Using an analytically tractable heterogeneous agent New Keynesian model, we show that whether incomplete markets resolve New Keynesian “paradoxes” depends on the cyclicality of income risk. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these “puzzles.” Procyclical risk permits determinacy under a peg; countercyclical risk may generate indeterminacy even under the Taylor principle. By affecting the cyclicality of risk, even “passive” fiscal policy influences the effects of monetary policy.

scholarly journals Monetary Policy, Bounded Rationality, and Incomplete Markets

2019 ◽  
Vol 109 (11) ◽  
pp. 3887-3928 ◽  
Author(s):  
Emmanuel Farhi ◽  
Iván Werning
Keyword(s):  
Monetary Policy ◽  
Bounded Rationality ◽  
Incomplete Markets ◽  
Idiosyncratic Risk ◽  
Borrowing Constraints ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Benchmark Model ◽  
Forward Guidance ◽  
Keynesian Model

This paper extends the benchmark New-Keynesian model by introducing two frictions: (i) agent heterogeneity with incomplete markets, uninsurable idiosyncratic risk, and occasionally-binding borrowing constraints; and (ii) bounded rationality in the form of level-k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is more pronounced at long horizons, and offers a potential rationalization of the “forward guidance puzzle.” Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model. (JEL D52, D81, E12, E52)

Pareto improving financial innovation in incomplete markets

1998 ◽  
Vol 11 (3) ◽  
pp. 467-494 ◽  
Author(s):  
David Cass ◽  
Alessandro Citanna
Keyword(s):  
Incomplete Markets ◽  
Financial Innovation ◽  
Pareto Improving

scholarly journals Pareto-Improving Social Security Reform when Financial Markets Are Incomplete!?

2006 ◽  
Vol 96 (3) ◽  
pp. 737-755 ◽  
Author(s):  
Dirk Krueger ◽  
Felix Kubler
Keyword(s):  
Social Security ◽  
Financial Markets ◽  
Incomplete Markets ◽  
Labor Income ◽  
Crowding Out ◽  
Pareto Improvement ◽  
Overlapping Generations Model ◽  
Stochastic Production ◽  
Unfunded Social Security ◽  
Pareto Improving

This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated, a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto-improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains.

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