Abstract : A liquidity-insurance motive for monetary policy operates when heterogeneous households use government-provided liquidity (“money”) to insure idiosyncratic risk. In our tractable sticky-price model this changes the central bank's trade-off by adding a linear benefit of insurance in the second-order approximation to aggregate welfare. Inflation volatility hinders the consumption volatility of constrained households as a side-effect of liquidity-insuring them; but price stability has quantitatively significant welfare costs only when monopolistic rents are also large, which indicates a complementarity between imperfect-insurance and New-Keynesian distortions. Helicopter drops are welfare-superior to open-market operations to achieve insurance, but quantitatively their benefit is surprisingly small.
https://hal-sciencespo.archives-ouvertes.fr/hal-03501417 Contributor : Melissa MundellConnect in order to contact the contributor Submitted on : Thursday, December 30, 2021 - 1:57:10 PM Last modification on : Friday, April 1, 2022 - 3:51:16 AM