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Anticipation of Future Consumption: A Monetary Perspective
Author(s) -
FARIA JOÃO RICARDO,
MCADAM PETER
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12008
Subject(s) - economics , anticipation (artificial intelligence) , consumption (sociology) , interest rate , monetary policy , stock (firearms) , nominal interest rate , inflation (cosmology) , perspective (graphical) , keynesian economics , econometrics , monetary economics , real interest rate , computer science , mechanical engineering , social science , physics , artificial intelligence , sociology , theoretical physics , engineering
We adapt the monetary model (Sidrauski 1967) to study the hypothesis of anticipation of future consumption. We assume that anticipation of future consumption affects an agent’s instantaneous utility and that all effects of future consumption on current well‐being are captured by the stock of future consumption. Monetary policy effectiveness is thereby reduced and a zero nominal lower interest rate (and thus the Friedman rule) is destabilizing. Given this, we can derive a “just stable” equilibrium nominal interest rate with matching definitions for inflation and monetary growth. We demonstrate that these implied lower bounds match their historical analogues well.