Efficacy of Monetary Policy and Limited Asset Market Participation: Neoclassical vs. Keynesian Effects

Abstract

This short paper investigates the effects of limited asset market participation on the efficacy of monetary policy in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Although an increase in consumers who cannot access to the financial markets reduces effects of interest rate policies via the consumption inter-temporal allocation (Neoclassical or permanent income effect), we find that an opposite result: monetary policy becomes more effective as the degree of financial markets participation falls. The reason has a very Keynesian flavor.

Keywords: Consumers' heterogeneity, efficacy of monetary policy

JEL Classification: E61, E63