Money Targeting, Heterogeneous Agents and Dynamic Instability
Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption di¤erences and the model is determinate provided that the nonnegativity constraint on individual money holdings is satis ed