This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset...

Support for the Taylor principle is considerable but the focus of empirical investigation has been on estimated coefficients at the mean of the interest rate distribution. We offer a new approach that estimates the response of interest rates to inflation and the output gap at various points...