02141cas a2200253 a 4500 AALejournalIMF004420 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451864601 1018-5941 BD-DhAAL BD-DhAAL Bilbiie, Florin. Asset Market Participation, Monetary Policy Rules, and the Great Inflation / Florin Bilbiie, Roland Straub. Washington, D.C. : International Monetary Fund, 2006. 1 online resource (34 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price dynamic stochastic general equilibrium model, which implies that at low asset-market participation rates, the interest rate elasticity of output (the slope of the IS curve) becomes positive - that is, "non-Keynesian." Remarkably, in that case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Consequently, we argue that the policy of the Federal Reserve System in the pre-Volcker era, often associated with a passive monetary policy rule, was closer to optimal than conventional wisdom suggests and may thus have remained unchanged at a fundamental level thereafter. We provide institutional and empirical evidence for our hypothesis, in the latter case using Bayesian estimation techniques, and show that our model is able to explain most features of the "Great Inflation.". Mode of access: Internet Straub, Roland. IMF Working Papers; Working Paper ; No. 2006/200 Full text available on IMF http://elibrary.imf.org/view/journals/001/2006/200/001.2006.issue-200-en.xml IMF e-Library