State dependent monetary policy
AbstractWe study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets, which give rise to a business cycle. In this setting money policy has distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash-poor unproductive agents. To minimize the inflationary effect of these expansions, the policy prescribes monetary contractions in good times. Although the optimal money growth rate varies greatly through the business cycle, this policy "echoes" Friedman's principle in the sense that the expected real return of money approaches the rate of time preference.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 13-17.
Date of creation: 2013
Date of revision:
Other versions of this item:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-CBA-2013-11-09 (Central Banking)
- NEP-DGE-2013-11-09 (Dynamic General Equilibrium)
- NEP-MAC-2013-11-09 (Macroeconomics)
- NEP-MON-2013-11-09 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Edward J. Green & Ruilin Zhou, 2005.
"Money As A Mechanism In A Bewley Economy,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 351-371, 05.
- Yann Algan & Edouard Challe & Xavier Ragot, 2011.
"Incomplete markets and the output–inflation tradeoff,"
Springer, vol. 46(1), pages 55-84, January.
- Xavier Ragot & Olivier Allais & Edouard Challe & Yann Algan, 2008. "Incomplete Markets and the Output-inflation Tradeoff," Sciences Po publications 2006 - 45, Sciences Po.
- Yann Algan & Edouard Challe & Xavier Ragot, 2008. "Incomplete markets and the output-inflation tradeoff," PSE Working Papers halshs-00589134, HAL.
- Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2004.
"Heterogeneity, Redistribution, and the Friedman Rule,"
Staff General Research Papers
11371, Iowa State University, Department of Economics.
- Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, And The Friedman Rule," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, 05.
- Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2004. "Heterogeneity, redistribution, and the Friedman rule," Research Working Paper RWP 04-01, Federal Reserve Bank of Kansas City.
- Shouyong Shi, 1996.
"A Divisible Search Model of Fiat Money,"
930, Queen's University, Department of Economics.
- David K. Levine, 1991.
"Asset Trading Mechanisms and Expansionary Policy,"
Levine's Working Paper Archive
43, David K. Levine.
- Aleksander Berentsen & Gabriele Camera & Christopher Waller, .
"The Distribution of Money Balances and the Non-Neutrality of Money,"
IEW - Working Papers
220, Institute for Empirical Research in Economics - University of Zurich.
- Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, 05.
- Veronica Guerrieri & Guido Lorenzoni, 2011.
"Credit Crises, Precautionary Savings, and the Liquidity Trap,"
NBER Working Papers
17583, National Bureau of Economic Research, Inc.
- Guido Lorenzoni & Veronica Guerrieri, 2011. "Credit Crises, Precautionary Savings and the Liquidity Trap," 2011 Meeting Papers 1414, Society for Economic Dynamics.
- Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-80, December.
- Veronica Guerrieri & Guido Lorenzoni, 2007.
"Liquidity and Trading Dynamics,"
NBER Working Papers
13204, National Bureau of Economic Research, Inc.
- Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
- Timothy J. Kehoe & David K. Levine & Michael Woodford, 1992.
"The Optimum Quantity of Money Revisited,"
Levine's Working Paper Archive
2035, David K. Levine.
- Shi, Shouyong, 1999. "Money, capital, and redistributive effects of monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 565-590, February.
- Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
- Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
- Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (William Perkins).
If references are entirely missing, you can add them using this form.