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Trigger-Target Rules Need Not Be Optimal with Fixed Adjustment Costs: A Simple Comment on Optimal Money Holding under Uncertainty

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  • Bar-Ilan, Avner

Abstract

Literature concerning the transactions theory of demand for money often contains the assumption that simple trigger-target rules are optimal when each financial transaction is accompanied by a fixed cost. The validity of this assumption is examined in this paper. Using a simple example, it is shown that the optimal money rule in discrete time models of money demand may be much more complicated than the simple rules assumed to be optimal in the literature. However, when considering continuous time models of money demand or when adjustment of the money stock is allowed in one direction only, simple trigger-target rules are in fact optimal. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • Bar-Ilan, Avner, 1990. "Trigger-Target Rules Need Not Be Optimal with Fixed Adjustment Costs: A Simple Comment on Optimal Money Holding under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 229-234, February.
  • Handle: RePEc:ier:iecrev:v:31:y:1990:i:1:p:229-34
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    Cited by:

    1. Andrew Clausen & Carlo Strub, 2012. "Envelope theorems for non-smooth and non-concave optimization," ECON - Working Papers 062, Department of Economics - University of Zurich.
    2. Bar-Ilan, Avner & Sulem, Agnes & Zanello, Alessandro, 2002. "Time-to-build and capacity choice," Journal of Economic Dynamics and Control, Elsevier, vol. 26(1), pages 69-98, January.
    3. Greene, Clinton A., 2010. "Smooth-adjustment econometrics and inventory-theoretic money management," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1031-1047, June.

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