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Monetary Policy with Heterogeneous Agents and Borrowing Constraints

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  • Yann Algan

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Xavier Ragot

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

Abstract

We show that the long-run neutrality of inflation on capital accumulation obtained in complete market models no longer holds when households face binding credit constraints. Borrowing-constrained households are not able to rebalance their financial portfolio when inflation varies, and thus adjust their money holdings differently compared to unconstrained households. This heterogeneity leads to a new precautionary savings motive, which implies that inflation increases capital accumulation. We quantify the importance of this new channel in an incomplete market model where the traditional redistributive effects of inflation are also introduced. We show that this model provides a quantitative rationale for the observed hump-shaped relationship between inflation and capital accumulation.

Suggested Citation

  • Yann Algan & Xavier Ragot, 2010. "Monetary Policy with Heterogeneous Agents and Borrowing Constraints," SciencePo Working papers Main hal-01170621, HAL.
    • Handle: RePEc:hal:spmain:hal-01170621
    DOI: 10.1016/j.red.2009.05.001
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01170621
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    More about this item

    Keywords

    Incomplete Markets; Monetary Policy;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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