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Elastic Money, Inflation, and Interest Rate Policy

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  • Head, Allen
  • Qiu, Junfeng

Abstract

We study optimal monetary policy in an environment in which money plays a basic role in facilitating exchange, aggregate shocks affect households asymmetrically and exchange may be conducted using either bank deposits (inside money) or fiat currency (outside money). A central bank controls the stock of outside money in the long-run and responds to shocks in the short-run using an interest rate policy that manages private banks’ creation of inside money and influences households’ consumption. The zero bound on nominal interest rates prevents the central bank from achieving efficiency in all states. Long-run inflation can improve welfare by mitigating the effect of this bound.

Suggested Citation

  • Head, Allen & Qiu, Junfeng, 2011. "Elastic Money, Inflation, and Interest Rate Policy," Queen's Economics Department Working Papers 273628, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273628
    DOI: 10.22004/ag.econ.273628
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    References listed on IDEAS

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    Cited by:

    1. Junfeng Qiu, 2011. "Bank money, aggregate liquidity, and asset prices," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 295-346, November.

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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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