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Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy

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  • Radhika Lahiri

Abstract

This paper examines the role of monetary policy in the presence of endogenous time preference. The framework in which this issue is addressed is a monetary model with cash-in-advance constraints and an additional trading friction that is typical of the class of “liquidity models†of the monetary business cycle. We find that the nature of the optimal policy designed to remove these distortions gets modified in the presence of endogenous utility discounting. Consequently the role of monetary policy is significantly altered. Specifically, for a range of parameters that is plausible from an empirical point of view, monetary policy is likely to be less activist relative to the model with a fixed rate of time preference

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File URL: http://repec.org/esAUSM04/up.3766.1077816999.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 204.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:204

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Keywords: optimal monetary policy; liquidity effects;

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Cited by:
  1. Radhika Lahiri & Elizabeth Richardson, 2008. "Public and Private Expenditures on Health in the Presence of Inequality and Endogenous Mortality: A Political Economy Perspective," School of Economics and Finance Discussion Papers and Working Papers Series 240, School of Economics and Finance, Queensland University of Technology, revised 15 Dec 2008.
  2. Aoki, Yoshimasa & Tomoda, Yasunobu, 2009. "Optimal money supply in models with endogenous discount factor," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 798-810, August.

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