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Optimal Monetary Policy in a Cash-in-Advance Economy


  • Fuerst, Timothy S


The issue of optimal monetary policy within a particular general equilibrium model of the monetary transmission mechanism is addressed. The model analyzed is a member of the recent class of liquidity models of the monetary business cycle. The nature of the trading frictions that define these models introduces a role for activist monetary policy. In particular, to the extent that the central bank can adjust liquidity more rapidly than the private sector, there is a welfare-improving role for monetary policy. In contrast to traditional policy prescriptions for aggregate demand management, this is a prescription for liquidity management. Copyright 1994 by Oxford University Press.

Suggested Citation

  • Fuerst, Timothy S, 1994. "Optimal Monetary Policy in a Cash-in-Advance Economy," Economic Inquiry, Western Economic Association International, vol. 32(4), pages 582-596, October.
  • Handle: RePEc:oup:ecinqu:v:32:y:1994:i:4:p:582-96

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    References listed on IDEAS

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    Cited by:

    1. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 247-267, November.
    2. Aoki, Yoshimasa & Tomoda, Yasunobu, 2009. "Optimal money supply in models with endogenous discount factor," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 798-810, August.
    3. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-1136, November.
    4. Cole, Harold L. & Ohanian, Lee E., 2002. "Shrinking money: the demand for money and the nonneutrality of money," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 653-686, May.
    5. Harold L. Cole & Lee E. Ohanian, 1998. "The demand for money and the nonneutrality of money," Staff Report 246, Federal Reserve Bank of Minneapolis.

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