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Incentives and the Limits to Deflationary Policy

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  • Andolfatto, David

Abstract

I study a version of the Lagos-Wright (2005) model for which the Friedman rule is always a desirable policy, but where implementation may be constrained by the need to respect incentive-feasibility. In the environment I consider, incentives are distorted owing to private information and limited commitment. I demonstrate that a monetary economy can overcome the former friction, but not necessarily the latter. When this is so, there is an incentive-induced lower bound to the rate of deflation away from the Friedman rule. There are also circumstances in which the best incentive-feasible monetary policy may entail a strictly positive rate of inflation. This will be the case, for example, if agents are sufficiently impatient or if there are rapidly diminishing returns to production.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4681.

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Date of creation: 01 Sep 2007
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Handle: RePEc:pra:mprapa:4681

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Keywords: Money; Memory; Incentives; Friedman Rule;

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References

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  1. Christopher J. Waller, 2009. "Dynamic taxation, private information and money," Working Papers, Federal Reserve Bank of St. Louis 2009-035, Federal Reserve Bank of St. Louis.
  2. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output and welfare," Staff Report, Federal Reserve Bank of Minneapolis 342, Federal Reserve Bank of Minneapolis.
  4. Deviatov Alexei & Wallace Neil, 2001. "Another Example in which Lump-sum Money Creation is Beneficial," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 1(1), pages 1-22, February.
  5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(3), pages 463-484, June.
  6. Tai-wei Hu & John Kennan & Neil Wallace, 2007. "Coalition-Proof Trade and the Friedman Rule in the Lagos-Wright Model," NBER Working Papers, National Bureau of Economic Research, Inc 13310, National Bureau of Economic Research, Inc.
  7. Stephen Williamson, 2004. "Search, Limited Participation, and Monetary Policy," 2004 Meeting Papers, Society for Economic Dynamics 214, Society for Economic Dynamics.
  8. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 232-251, August.
  9. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers, Queen's University, Department of Economics 930, Queen's University, Department of Economics.
  10. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  11. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, Elsevier, vol. 54(1), pages 148-164, June.
  12. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  13. Narayana Kocherlakota, 2002. "The Two-Money Theorem," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(2), pages 333-346, May.
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Cited by:
  1. James Bullard & Gaetano Antinolfi & Costas Azariadis, 2008. "The optimal inflation target in an economy with limited enforcement," Speech, Federal Reserve Bank of St. Louis 167, Federal Reserve Bank of St. Louis.
  2. Aleksander Berentsen & Cyril Monet, 2006. "Monetary Policy in a Channel System," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 295, Institute for Empirical Research in Economics - University of Zurich.
  3. Randall Wright, 2014. "Marriage, Markets and Money: A Coasian Theory of Household Formation," 2014 Meeting Papers, Society for Economic Dynamics 237, Society for Economic Dynamics.
  4. David Andolfatto, 2009. "Essential interest-bearing money," Working Papers, Federal Reserve Bank of St. Louis 2009-044, Federal Reserve Bank of St. Louis.
  5. Guillaume Rocheteau, 2009. "A monetary approach to asset liquidity," Working Paper, Federal Reserve Bank of Cleveland 0901, Federal Reserve Bank of Cleveland.
  6. Williamson, Stephen & Sanches, Daniel, 2009. "Money and Credit With Limited Commitment and Theft," MPRA Paper, University Library of Munich, Germany 20690, University Library of Munich, Germany.
  7. Alessandro Marchesiani & Aleksander Berentsen, 2010. "Standing Facilities Versus Open Market Operations: Equivalence Results," 2010 Meeting Papers, Society for Economic Dynamics 929, Society for Economic Dynamics.
  8. Guillaume Rocheteau, 2008. "Money and competing assets under private information," 2008 Meeting Papers, Society for Economic Dynamics 525, Society for Economic Dynamics.

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