Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/53867 
Year of Publication: 
2007
Series/Report no.: 
Bank of Canada Working Paper No. 2007-26
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper examines the role of monetary policy in an environment with aggregate risk and incomplete markets. In a two-period overlapping-generations model with aggregate uncertainty and nominal bonds, optimal monetary policy attains the ex-ante Pareto optimal allocation. This policy aims to stabilize the savings rate in the economy via the effect of expected inflation on real returns of nominal bonds. The equilibrium under optimal monetary policy is characterized by positive average inflation and a nonstationary price level. In an application a key finding is that optimal monetary policy combines features of inflation and price-level targeting.
Subjects: 
Monetary policy framework
JEL: 
E5
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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