Gaps and triangles

Bernardino Adao (), Isabel Correia () and Pedro Teles ()

No WP-01-13, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: In this paper, we derive principles of optimal cyclical monetary policy in an economy without capital, with a cash-in-advance restriction on household transactions, and with monopolistic firms that set prices one period in advance. The only distortionary policy instruments are the nominal interest rate and the money supply. In this environment, it is feasible to undo both the cash in advance and the price setting restrictions, but not the monopolistic competition distortion. We show that it is optimal to follow the Friedman rule, and thus offset the cash-in-advance restriction.

Keywords: Monetary; policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-pke
Date: 2001
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Related works:
Working Paper: Gaps and Triangles (2001)
Working Paper: Gaps and Triangles (2000)
Journal Article: Gaps and Triangles (2003)
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