Monetary Policy and Endowment Risk in a Limited Participation Model

Monetary Policy and Endowment Risk in a Limited Participation Model

A limited participation model is constructed to study the risk-sharing role of monetary policy. A fraction of households exchange money for interest-bearing government nominal bonds in the asset market. The government injects money through open market operations with only participating households. In equilibrium, money is nonneutral and there are distributional effects of monetary policy. Monetary policy is a perfect risk-sharing tool without endowment risk, but it is not with idiosyncratic endowment risk. The Friedman rule is not optimal in general.

1 Introduction

2 The Model

3 Equilibrium Dynamics

4 Without Idiosyncratic Shocks

5 With Idiosyncratic Shocks

6 Conclusion

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