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.
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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:
- Francesco Lippi & Stefania Ragni & Nicholas Trachter, 2013. "State Dependent Monetary Policy," EIEF Working Papers Series 1324, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2013.
- Lippi, Francesco & Ragni, Stefania & Trachter, Nicholas, 2014. "State dependent monetary policy," CEPR Discussion Papers 9795, C.E.P.R. Discussion Papers.
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
This paper has been announced in the following NEP Reports:
- 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)
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