Monetary Policy under Finite Speed of Trades and Myopia

Gaël Giraud and Nguenamadji Orntangar ()
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Nguenamadji Orntangar: Centre d'Economie de la Sorbonne - Paris School of Economics, https://centredeconomiesorbonne.cnrs.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: 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

Keywords: Central Bank; gains to trade; Taylor rule; myopia; liquidity trap; finite speed of trade (search for similar items in EconPapers)
JEL-codes: D50 E40 E50 E58 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-07
New Economics Papers: this item is included in nep-cba and nep-mon
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http://mse.univ-paris1.fr/pub/mse/CES2011/11011.pdf (application/pdf)

Related works:
Working Paper: Monetary policy under finite speed of trades and myopia (2011)
Working Paper: Monetary policy under finite speed of trades and myopia (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:11011

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