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
Copyright Owner
Elsevier B.V.
Copyright Date
2007
Language
en
File Format
application/pdf
Recommended Citation
Bhattacharya, Joydeep and Singh, Rajesh, "Optimal choice of monetary policy instruments in an economy with real and liquidity shocks" (2008). Economics Publications. 612.
https://lib.dr.iastate.edu/econ_las_pubs/612
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.