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State dependent monetary policy

Francesco Lippi, Stefania Ragni and Nicholas Trachter

No 13-17, Working Paper from Federal Reserve Bank of Richmond

Abstract: We study the optimal anticipated monetary policy in a flexible-price economy featuring heterogenous agents and incomplete markets, which give rise to a business cycle. In this setting money policy has distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by cash-poor unproductive agents. To minimize the inflationary effect of these expansions, the policy prescribes monetary contractions in good times. Although the optimal money growth rate varies greatly through the business cycle, this policy "echoes" Friedman's principle in the sense that the expected real return of money approaches the rate of time preference.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2013
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Working Paper: State dependent monetary policy (2014) Downloads
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