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On the Determinacy of Monetary Steady States: Disequilibrium Learning and Optimal Monetary Policy

Luiz de Mello and J.R. Faria ()

Studies in Economics from School of Economics, University of Kent

Abstract: The paper identifies the sources of indeterminacy of monetary steady states in a model of optimum supply of money in which the government maximises revenue through seignorage subject to an underlying inflationary process. We show that the determination of the monetary expansion path is sensitive to the specification of the disequilibrium learning rule and is subject to informational problems. Determinacy is ensured under a specific learning rule, which combines elements of adaptive and rational expectations and is self-corrective. The solution provides an optimal monetary policy which combines zero inflation, positive money and balanced budget.

Keywords: Multiple Equilibria; Seignorage; Money Supply; Disequilibrium Learning (search for similar items in EconPapers)
JEL-codes: E41 E52 (search for similar items in EconPapers)
Date: 1996-03
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