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Monetary policy under finite speed of trades and myopia

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  • Gaël Giraud

    () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, ESCP-Europe - Campus de Paris)

  • Nguenamadji Orntangar

    () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

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    Abstract

    This paper provides a new framework for monetary macro-policy, where the Central Bank potentially intervenes both on short-term and long-term loans markets, and can do this alternatively by manipulating interest rates or money supply. Following Bonnisseau and Orntangar (2010) and Giraud and Tsomokos (2010), we develop a discrete-time out-of-equilibrium dynamics with real trades, performed by myopic heterogeneous households in a cash-in-advance economy with several goods. Positive value and non-neutrality of fiat money are shown to be compatible with a local quantity theory of money. Every monetary policy induces a globally unique trade path, both for real and nominal variables.Thus, monetary policy and myopia suffice to pin down the absolute level of prices. However, a minimal money growth rate is exhibited, which depends upon the level of households' long-term debt and current gains-to-trade. Below this growth rate, the economy falls into a local liquidity trap ; above it, the economy eventually converges towards a Pareto-optimal rest-point while inflation raises in an unbounded fashion. As a consequence, a literal application of Taylor's rule leads the economy to a local liquidity trap. These findings provide insight into recent non-conventional monetary policies led by Central Banks.

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    Bibliographic Info

    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00609824.

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    Date of creation: Jul 2011
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    Handle: RePEc:hal:cesptp:halshs-00609824

    Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00609824
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    Related research

    Keywords: Central Bank; gains to trade; Taylor rule; myopia; liquidity trap.;

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    1. Krisztina Molnár & Sergio Santoro, 2010. "Optimal Monetary Policy When Agents Are Learning," Working Paper 2010/08, Norges Bank.
    2. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May.
    3. Jean-Marc Bonnisseau & Orntangar Nguenamadji, 2009. "Discrete Walrasian Exchange Process," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00442865, HAL.
    4. Magnus Forsells & Geoff Kenny, 2002. "The rationality of consumers' inflation expectations: survey-based evidence for the Euro area," Working Paper Series 163, European Central Bank.
    5. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    6. Smale, Stephen, 1976. "Exchange processes with price adjustment," Journal of Mathematical Economics, Elsevier, vol. 3(3), pages 211-226, December.
    7. Bonnisseau, Jean-Marc & Nguenamadji, Orntangar, 2010. "On the uniqueness of local equilibria," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 623-632, September.
    8. Gaël Giraud & Dimitrios Tsomocos, 2010. "Nominal uniqueness and money non-neutrality in the limit-price exchange process," Economic Theory, Springer, vol. 45(1), pages 303-348, October.
    9. John M. Roberts, 1994. "Is inflation sticky?," Working Paper Series / Economic Activity Section 152, Board of Governors of the Federal Reserve System (U.S.).
    10. Champsaur, P. & Cornet, B., 1989. "Walrasian Exchange Processes," CORE Discussion Papers 1989030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Klaus Adam & Mario Padula, 2002. "Inflation Dynamics and Subjective Expectations in the United States," CSEF Working Papers 78, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 02 Jun 2009.
    12. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer, vol. 25(1), pages 51-74, 01.
    13. J. Doyne Farmer & John Geanakoplos, 2008. "The virtues and vices of equilibrium and the future of financial economics," Papers 0803.2996, arXiv.org.
    14. Giraud, Gael, 2003. "Strategic market games: an introduction," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 355-375, July.
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