Monetary Policy with Heterogeneous Agents and Borrowing Constraints

Yann Algan (1) , Xavier Ragot (2)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 ECON - Département d'économie (Sciences Po)

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.

Mots clés: Incomplete Markets; Monetary Policy

Domaines: Economies et finances

Yann Algan, Xavier Ragot. Monetary Policy with Heterogeneous Agents and Borrowing Constraints. Review of Economic Dynamics, 2010, 13 (2), pp.295-316. ⟨10.1016/j.red.2009.05.001⟩. ⟨hal-01170621⟩