Galo Nuno (Bank of Spain)

This week's speaker will be Galo Nuno from the Bank of Spain. 

Title: Optimal Monetary Policy with Heterogeneous Agents

Abstract: Incomplete markets models with heterogeneous agents are increasingly used for policy analysis. We propose a novel methodology for solving fully dynamic optimal policy problems in models of this kind, both under discretion and commitment. We illustrate our methodology by studying optimal monetary policy in an incomplete-markets model with non-contingent nominal assets and costly infl‡ation. Under discretion, an in‡flationary bias arises from the central bank’s attempt to redistribute wealth towards debtor households, which have a higher marginal utility of net wealth. Under commitment, this infl‡ationary force is counteracted over time by the incentive to prevent expectations of future infl‡ation from being priced into new bond issuances; under certain conditions, long run infl‡ation is zero as both effects cancel out asymptotically. For a plausible calibration, we fi…nd that the optimal commitment features …first-order initial in‡ation followed by a gradual decline towards its (near zero) long-run value. Welfare losses from discretionary policy are fi…rst-order in magnitude, affecting both debtors and creditors.

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