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OPTIMAL MONETARY POLICY IN A CASH‐IN ADVANCE ECONOMY
Author(s) -
Fuerst Timothy S.
Publication year - 1994
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1994.tb01352.x
Subject(s) - monetary policy , economics , market liquidity , monetary economics , liquidity trap , welfare , general equilibrium theory , liquidity risk , business cycle , cash , macroeconomics , market economy
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.”