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Can Money Matter for Interest Rate Policy?


  • Matthias Brückner
  • Andreas Schabert


In this paper it is shown that money can matter for macroeconomic stability under interest rate policy, if transactions frictions are specified in a consistent way. We develop a sticky price model with a shopping time specification, which induces the marginal utility of consumption to depend on the (predetermined) stock of money held at the beginning of the period. Saddle path stability is then ensured by a passive interest rate policy, whereas activeness is associated with an explosive equilibrium path unless the central bank reacts to changes in beginning-of-period real balances. When the central bank aims at minimizing macroeconomic distortions, real balances enter the interest rate feedback rule under discretionary optimization. If it is alternatively assumed that end-of-period money provides transaction services, money can be neglected for interest rate policy in order to implement the optimal plan. However, the equilibrium under the targeting rule is likely to be indetermined, allowing for endogenous fluctuations, which can be avoided by the central bank implementing the optimal plan with an interest rate feedback rule featuring beginning-of-period real balances.

Suggested Citation

  • Matthias Brückner & Andreas Schabert, 2004. "Can Money Matter for Interest Rate Policy?," Working Paper Series in Economics 6, University of Cologne, Department of Economics.
  • Handle: RePEc:kls:series:0006

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    References listed on IDEAS

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    Cited by:

    1. Christian A. Stoltenberg, 2012. "Real Balance Effects, Timing, and Equilibrium Determination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 981-994, August.
    2. Franz Seitz & Markus A. Schmidt, 2014. "Money In Modern Macro Models: A Review of the Arguments," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 156-174.
    3. Schabert, Andreas, 2005. "Discretionary Policy, Multiple Equilibria, and Monetary Instruments," CEPR Discussion Papers 5400, C.E.P.R. Discussion Papers.
    4. Feldkord, Eva-Ulrike, 2005. "On the relevance of monetary aggregates in monetary policy models," HWWA Discussion Papers 317, Hamburg Institute of International Economics (HWWA).

    More about this item


    Transactions frictions; predetermined money; real balance effects; saddle path stability; discretionary optimization;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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