IDEAS home Printed from https://ideas.repec.org/p/isu/genstf/200804010700001160.html

Optimal choice of monetary policy instruments in an economy with real and liquidity shocks

Author

Listed:
  • Bhattacharya, Joydeep
  • Singh, Rajesh

Abstract

Faced with real and nominal shocks, what should a benevolent central bank do, fix the money growth rate or target the inflation rate? In this paper, we make a first attempt at studying the optimal choice of monetary policy instruments in a micro-founded model of money. Specifically, we produce an overlapping generations economy in which limited communication and stochastic relocation creates an endogenous transactions role for fiat money. We find that when the shocks are real, welfare is higher under money growth targeting; when the shocks are nominal and not large, welfare is higher under inflation targeting. While under inflation targeting, it is always optimal to pursue an expansionary policy, it is never optimal to do so under money growth targeting.

Suggested Citation

  • Bhattacharya, Joydeep & Singh, Rajesh, 2008. "Optimal choice of monetary policy instruments in an economy with real and liquidity shocks," ISU General Staff Papers 200804010700001160, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:200804010700001160
    as

    Download full text from publisher

    File URL: https://dr.lib.iastate.edu/server/api/core/bitstreams/cd23106c-c98a-4b01-8532-6a8e878c8e33/content
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bhattacharya, Joydeep & Singh, Rajesh, 2010. "Optimal monetary rules under persistent shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 34(7), pages 1277-1294, July.
    2. Bénassy, Jean-Pascal, 2012. "Destabilizing optimal policies in the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 36(9), pages 1364-1371.
    3. Matsuoka, Tarishi, 2012. "Imperfect interbank markets and the lender of last resort," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1673-1687.
    4. Bui Trung Thanh & Gábor Kiss Dávid, 2021. "Measuring monetary policy by money supply and interest rate: evidence from emerging economies," Review of Economic Perspectives, Sciendo, vol. 21(3), pages 347-367, September.
    5. Eisei Ohtaki, 2023. "Climate change, financial intermediation, and monetary policy," Working Papers e179, Tokyo Center for Economic Research.
    6. Jordi Caballé & Jana Hromcová, 2011. "The Role of Central Bank Operating Procedures in an Economy with Productive Government Spending," Computational Economics, Springer;Society for Computational Economics, vol. 37(1), pages 39-65, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:isu:genstf:200804010700001160. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Curtis Balmer (email available below). General contact details of provider: https://edirc.repec.org/data/deiasus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.