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Some benefits of cyclical monetary policy

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  • Ricardo de O. Cavalcanti
  • Ed Nosal

Abstract

In this paper, we present a simple random-matching model in which different seasons translate into different propensities to consume and produce. We find that the cyclical creation and destruction of money is beneficial for welfare under a wide variety of circumstances. Our model of seasons can be interpreted as providing support for the creation of the Federal Reserve System, with its mandate of supplying an elastic currency for the nation.

Suggested Citation

  • Ricardo de O. Cavalcanti & Ed Nosal, 2005. "Some benefits of cyclical monetary policy," Working Paper 0511, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0511
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    References listed on IDEAS

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    1. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, pages 148-164.
    2. 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, vol. 47(3), pages 701-722, August.
    3. Kevin Huang & Z. Liu, "undated". "Staggered contracts and business cycle persistence," Working Papers 2000-08, Utah State University, Department of Economics.
    4. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, pages 463-484.
    5. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, pages 125-140.
    6. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, pages 927-954.
    7. Ricardo Lagos, 2006. "A Model of TFP," Review of Economic Studies, Oxford University Press, pages 983-1007.
    8. Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1998. "Private Money and Reserve Management in a Random Matching Model," Macroeconomics 9803008, EconWPA.
    9. Kul B. Bhatia, 2001. "Specific Inputs, Value-Added, and Production Linkages in Tax-Incidence Theory," Public Finance Review, , vol. 29(6), pages 461-486, November.
    10. Cavalcanti, Ricardo & Erosa, Andres & Temzelides, Ted, "undated". "Private Money and Reserve Management in a Random Matching Model," Working Papers 97-17, University of Iowa, Department of Economics, revised Sep 1997.
    11. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, pages 75-102.
    12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, pages 103-124.
    13. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, pages 929-945.
    14. Deviatov Alexei & Wallace Neil, 2001. "Another Example in which Lump-sum Money Creation is Beneficial," The B.E. Journal of Macroeconomics, De Gruyter, pages 1-22.
    15. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, pages 1212-1236.
    16. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, pages 463-484.
    17. Ricardo de O. Cavalcanti & Andres Erosa, 1998. "Private Money And Reserve Management In A Random Matching Model," Macroeconomics 9802010, EconWPA.
    18. Francis X. Diebold & Lutz Kilian, 2001. "Measuring predictability: theory and macroeconomic applications," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 657-669.
    19. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 927-942, November.
    20. Ricardo O. Cavalcanti, 2004. "A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 769-788.
    21. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
    22. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, pages 23-45.
    23. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
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    Citations

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    Cited by:

    1. Aloisio Araujo & Mario Pascoa & Juan Pablo Torres-Martinez, 2005. "Bubbles, collateral and monetary equilibrium," Textos para discussão 513, Department of Economics PUC-Rio (Brazil).
    2. Araújo, Fabio & Issler, João Victor & Fernandes, Marcelo, 2006. "A stochastic discount factor approach to asset pricing using panel data," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 628, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    3. Ricardo Cavalcanti & Ed Nosal, 2011. "Counterfeiting as Private Money in Mechanism Design," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 625-636, October.
    4. Monteiro, Paulo Klinger, 2009. "First-price auction symmetric equilibria with a general distribution," Games and Economic Behavior, Elsevier, pages 256-269.
    5. Jonathan Chiu & Tsz-Nga Wong, 2015. "On the Essentiality of E-Money," Staff Working Papers 15-43, Bank of Canada.
    6. Hu, Tai-Wei & Rocheteau, Guillaume, 2013. "On the coexistence of money and higher-return assets and its social role," Journal of Economic Theory, Elsevier, pages 2520-2560.
    7. Monteiro, Paulo Klinger, 2009. "First-price auction symmetric equilibria with a general distribution," Games and Economic Behavior, Elsevier, pages 256-269.
    8. repec:eee:jetheo:v:172:y:2017:i:c:p:423-450 is not listed on IDEAS
    9. O. Cavalcanti, Ricardo de & Erosa, Andrés, 2008. "Efficient propagation of shocks and the optimal return on money," Journal of Economic Theory, Elsevier, pages 128-148.
    10. Flôres Junior, Renato Galvão, 2006. "The diversity of diversity: further methodological considerations on the use of the concept in cultural economics," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 626, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    11. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, pages 1261-1279.
    12. Flôres Junior, Renato Galvão & Watanuki, Masakazu, 2006. "Integration options for mercosul - an investigation Uusing the AMIDA Model," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 610, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    13. Cysne, Rubens Penha, 2006. "Income inequality in a job-search model with heterogeneous discount factors: (revised version, forthcoming 2006, Revista Economia)," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 611, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    14. Renato G. Flôres & Maria Paula Fontoura & Rogério Guerra Santos, 2007. "Foreign Direct Investment Spillovers in Portugal: Additional Lessons from a Country Study," The European Journal of Development Research, Taylor and Francis Journals, pages 372-390.
    15. Renato G. Flôres & Maria Paula Fontoura & Rogério Guerra Santos, 2007. "Foreign Direct Investment Spillovers in Portugal: Additional Lessons from a Country Study," The European Journal of Development Research, Taylor and Francis Journals, pages 372-390.
    16. Cysne, Rubens Penha, 2006. "An intra-household approach to the welfare costs of inflation (Revised Version, Forthcoming 2006, Estudos Econômicos)," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 612, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    17. Rivano, Ricardo de Oliveira & Wallace, Neil, 2006. "New models of old(?) payment questions," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 619, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    18. Flôres Junior, Renato Galvão, 2006. "Dois ensaios sobre diversidade cultural e o comércio de serviços," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 622, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    19. Ricardo de O. Cavalcanti, 2010. "Inside-money theory after Diamond and Dybvig," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 59-82.

    More about this item

    Keywords

    Monetary policy ; Money supply;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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