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State dependent monetary policy

Author

Listed:
  • Lippi, Francesco
  • Ragni, Stefania
  • Trachter, Nicholas

Abstract

We study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets, which give rise to a business cycle. In this setting money policy has distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash- poor unproductive agents. To minimize the inflationary effect of these expansions the policy prescribes monetary contractions in good times. Although the optimal money growth rate varies greatly through the business cycle, this policy “echoes” Friedman’s principle in the sense that the expected real return of money approaches the rate of time preference.

Suggested Citation

  • Lippi, Francesco & Ragni, Stefania & Trachter, Nicholas, 2014. "State dependent monetary policy," CEPR Discussion Papers 9795, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9795
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    References listed on IDEAS

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    1. repec:the:publsh:2821 is not listed on IDEAS
    2. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Russell, 0. "A tractable model of monetary exchange with ex-post heterogeneity," Theoretical Economics, Econometric Society.
    3. Jonathan Zinman, 2014. "Consumer Credit: Too Much or Too Little (or Just Right)?," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 209-237.
    4. Yves Achdou & Jiequn Han & Jean-Michel Lasry & Pierre-Louis Lions & Benjamin Moll, 2017. "Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach," NBER Working Papers 23732, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    distributional effects; heterogenous agents; incomplete markets; liquidity; precautionary savings;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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