Title

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

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

4-2008

Journal or Book Title

Journal of Economic Dynamics and Control

Volume

32

Issue

4

First Page or Article ID Number

1273

Last Page

1311

DOI

10.1016/j.jedc.2007.05.007

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.

JEL Classification

E31, E42, E63

Comments

This article is published as Optimal Choice of Monetary Instruments in an Economy with Real and Liquidity Shocks (with R.Singh); Journal of Economic Dynamics and Control, 32 (4), 1273-1311, 2008. DOI: 10.1016/j.jedc.2007.05.007. Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version Working Paper

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