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Savings, asset scarcity, and monetary policy

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  • Altermatt, Lukas

Abstract

This paper analyzes optimal monetary policy regarding asset markets in a model where money and savings are essential and asset markets matter. The model is able to explain why different regimes for the correlation of real interest rates and stock price-dividend ratios exist, and offers two explanations why the correlation vanished after 2007: A decrease in inflation or changes in the supply of risky and safe assets. The results on optimal policy show that away from the Friedman rule, fiscal policy can improve welfare by increasing the amount of outstanding government debt. If the fiscal authority is not willing or able to increase debt, the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks.

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  • Altermatt, Lukas, 2019. "Savings, asset scarcity, and monetary policy," Journal of Economic Theory, Elsevier, vol. 182(C), pages 329-359.
    • Handle: RePEc:eee:jetheo:v:182:y:2019:i:c:p:329-359
    DOI: 10.1016/j.jet.2019.04.004
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    Cited by:

    1. Altermatt, Lukas & Iwasaki, Kohei & Wright, Randall, 2021. "Asset pricing in monetary economies," Journal of International Money and Finance, Elsevier, vol. 115(C).
    2. Pedro Gomis‐Porqueras & Christopher Waller, 2022. "Optimal Taxes under Private Information: The Role of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 1941-1969, October.
    3. Lukas Altermatt & Christian Wipf, 2024. "Liquidity, the Mundell–Tobin Effect, and the Friedman Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(5), pages 1235-1259, August.

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    More about this item

    Keywords

    New monetarism; Overlapping generations; Zero lower bound; Optimal stabilization;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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