Optimal Monetary Policy in a Cash-in-Advance Economy

Timothy Fuerst

Economic Inquiry, 1994, vol. 32, issue 4, 582-96

Abstract: The issue of optimal monetary policy within a particular general equilibrium model of the monetary transmission mechanism is addressed. The model analyzed is a member of the recent class of liquidity models of the monetary business cycle. The nature of the trading frictions that define these models introduces a role for activist monetary policy. In particular, to the extent that the central bank can adjust liquidity more rapidly than the private sector, there is a welfare-improving role for monetary policy. In contrast to traditional policy prescriptions for aggregate demand management, this is a prescription for liquidity management. Copyright 1994 by Oxford University Press.

Date: 1994
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