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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

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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, 2006. "Optimal Monetary Policy When Agents Are Learning," IEHAS Discussion Papers 0601, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences, revised 15 Mar 2006.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    3. Gaetano Bloise & J. H. Dreze & H. M. Polemarchakis, 2003. "Monetary Equilibria over an Infinite Horizon," Discussion Papers 03-19, University of Copenhagen. Department of Economics.
    4. J. Doyne Farmer & John Geanakoplos, 2008. "The Virtues and Vices of Equilibrium and the Future of Financial Economics," Cowles Foundation Discussion Papers 1647, Cowles Foundation for Research in Economics, Yale University.
    5. Jean-Marc Bonnisseau & Orntangar Nguenamadji, 2008. "On the uniqueness of local equilibria," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00349204, HAL.
    6. Adam, Klaus & Padula, Mario, 2003. "Inflation dynamics and subjective expectations in the United States," Working Paper Series, European Central Bank 0222, European Central Bank.
    7. John M. Roberts, 1994. "Is inflation sticky?," Working Paper Series / Economic Activity Section 152, Board of Governors of the Federal Reserve System (U.S.).
    8. Jean-Marc Bonnisseau & Orntangar Nguenamadji, 2009. "Discrete Walrasian Exchange Process," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00442865, HAL.
    9. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, Econometric Society, vol. 39(3), pages 417-39, May.
    10. Giraud, Gael, 2003. "Strategic market games: an introduction," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 355-375, July.
    11. Gaël Giraud & Dimitrios P. Tsomocos, 2010. "Nominal Uniqueness and Money Non-neutrality in the Limit-Price Exchange Process," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 10061, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    12. Smale, Stephen, 1976. "Exchange processes with price adjustment," Journal of Mathematical Economics, Elsevier, vol. 3(3), pages 211-226, December.
    13. Champsaur, P. & Cornet, B., 1989. "Walrasian Exchange Processes," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1989030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Forsells, Magnus & Kenny, Geoff, 2002. "The rationality of consumers' inflation expectations: survey-based evidence for the euro area," Working Paper Series, European Central Bank 0163, European Central Bank.
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