Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy

Radhika Lahiri

No 204, Econometric Society 2004 Australasian Meetings from Econometric Society

Abstract: This paper examines the role of monetary policy in the presence of endogenous time preference. The framework in which this issue is addressed is a monetary model with cash-in-advance constraints and an additional trading friction that is typical of the class of “liquidity models†of the monetary business cycle. We find that the nature of the optimal policy designed to remove these distortions gets modified in the presence of endogenous utility discounting. Consequently the role of monetary policy is significantly altered. Specifically, for a range of parameters that is plausible from an empirical point of view, monetary policy is likely to be less activist relative to the model with a fixed rate of time preference

Keywords: optimal monetary policy; liquidity effects (search for similar items in EconPapers)
JEL-codes: E4 E52 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Liquidity Effects, Variable Time Preference, and Optimal Monetary Policy (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:ausm04:204

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