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“Conventional” Monetary Policy In Olg Models: Revisiting The Asset‐Substitution Channel

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  • Guanliang Hu
  • Guoxuan Ma
  • Wei Qiao
  • Neil Wallace

Abstract

Conventional monetary policy involves actions by the monetary and fiscal authorities: the former sets a nominal interest rate and the latter sets lump‐sum taxes to finance the implied flow of interest payments on government debt. We model such policy within an overlapping generations framework and show that absent any other frictions the magnitude of the nominal interest rate gives rise to asset substitution between government debt and either private debt or capital—substitution that has both real and nominal effects. Such substitution is not in standard New Keynesian models because their dynastic specification implies that government debt is not net wealth.

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  • Guanliang Hu & Guoxuan Ma & Wei Qiao & Neil Wallace, 2023. "“Conventional” Monetary Policy In Olg Models: Revisiting The Asset‐Substitution Channel," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 875-892, August.
    • Handle: RePEc:wly:iecrev:v:64:y:2023:i:3:p:875-892
    DOI: 10.1111/iere.12618
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