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Monetary policy under finite speed of trades and myopia

Listed author(s):
  • Gaël Giraud

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, ESCP Europe)

  • Nguenamadji Orntangar

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Registered author(s):

    This paper provides a new framework for monetary macro-policy, where the Central Bank potentially intervenes both on short-term and long-term loans markets, and can do this alternatively by manipulating interest rates or money supply. Following Bonnisseau and Orntangar (2010) and Giraud and Tsomokos (2010), we develop a discrete-time out-of-equilibrium dynamics with real trades, performed by myopic heterogeneous households in a cash-in-advance economy with several goods. Positive value and non-neutrality of fiat money are shown to be compatible with a local quantity theory of money. Every monetary policy induces a globally unique trade path, both for real and nominal variables.Thus, monetary policy and myopia suffice to pin down the absolute level of prices. However, a minimal money growth rate is exhibited, which depends upon the level of households' long-term debt and current gains-to-trade. Below this growth rate, the economy falls into a local liquidity trap ; above it, the economy eventually converges towards a Pareto-optimal rest-point while inflation raises in an unbounded fashion. As a consequence, a literal application of Taylor's rule leads the economy to a local liquidity trap. These findings provide insight into recent non-conventional monetary policies led by Central Banks.

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    File URL: https://halshs.archives-ouvertes.fr/halshs-00609824v2/document
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    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00609824.

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    Date of creation: Jul 2011
    Publication status: Published in Documents de travail du Centre d'Economie de la Sorbonne 2011.11 - ISSN : 1955-611X. 2011
    Handle: RePEc:hal:cesptp:halshs-00609824
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00609824v2
    Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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