Optimal Choice of Monetary Instruments in an Economy With Real and Liquidity Shocks

Bhattacharya, Joydeep; Singh, Rajesh

doi:10.2139/ssrn.721564

Cited by 4 publications

(6 citation statements)

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“…Setting~ < 1 aligns the decentralized marginal condition with that of the planner. 12 For technical details of this argument the reader is referred to Bhattacharya and Singh (2007), who obtain similar results for i.i.d. shocks.…”

mentioning

confidence: 66%

“…This is primarily because with higher persistence, the transitory component of the shock becomes less important. 4 Although our policy results for the case of endowment shocks have a similar ‡avor, the underlying reasons are somewhat di¤erent. In our set up sans shocks, as is well known, a …xed money supply (or equivalently, a constant price of consumption) is the optimal policy.…”

Section: Introductionmentioning

confidence: 76%

“…Indeed, the higher the persistence, the more volatile are the cash balances. Consequently, policy responses strengthen 4 In their model, agents "precautionarily"carry more money than what is optimal from a planner's perspective. Therefore, to discourage such savings, the optimal in ‡ation rate is positive.…”

Section: Introductionmentioning

confidence: 99%

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Optimal monetary rules under persistent shocks

Bhattacharya

Singh

2010

Journal of Economic Dynamics and Control

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The tug-o-war for supremacy between in ‡ation targeting and monetary targeting is a classic yet timely topic in monetary economics. In this paper, we revisit this question within the context of a pure-exchange overlapping generations model of money where spatial separation and random relocation create an endogenous demand for money. We distinguish between shocks to real output and shocks to the real interest rate. Both shocks are assumed to follow AR (1) processes. Irrespective of the nature of shocks, the optimal in ‡ation target is always positive. Under monetary targeting, shocks to endowment require negative money growth rates, while under shocks to real interest rates it may be either positive or negative depending on the elasticity of consumption substitution. Also, monetary targeting welfare-dominates in ‡ation targeting but the gap between the two vanishes as the shock process approaches a random walk. In sharp contrast, for shocks to the real interest rate, we prove that monetary targeting and in ‡ation targeting are welfare-equivalent only in the limit when the shocks become i.i.d.! The upshot is that persistence of the underlying fundamental uncertainty matters: depending on the nature of the shock, policy responses can either be more or less aggressive as persistence increases.JEL Classi…cation: E31, E42, E63

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confidence: 66%

Section: Introductionmentioning

confidence: 76%

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Optimal monetary rules under persistent shocks

Bhattacharya

Singh

2010

Journal of Economic Dynamics and Control

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“…2. The random relocation with limited communication model was popularized by Champ, Smith, and Williamson (1996) and has been used to investigate monetary policy issues in Paal and Smith (2000), Smith (2002), Antinolfi, Huybens, and Keister (2001), Haslag and Martin (2007), Antinolfi and Keister (2006), and Bhattacharya and Singh (2007), among others.…”

Section: Notesmentioning

confidence: 99%

Usefulness of the Constrained Planning Problem in a Model of Money

Bhattacharya

Singh

2008

Macroecon. Dynam.

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In this paper, we study a decentralized monetary economy with a specified set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is an extremely "efficient" (easy and quick) way of deriving optimal policies for the corresponding decentralized economies. Abstract.In this paper, we study a decentralized monetary economy with a speci…ed set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations generated by these policies. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is potentially an extremely "e¢ cient"(easy and quick) way of deriving optimal policies for the corresponding decentralized economies.JEL Classi…cation: E31, E42, E63

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“…For exampleBhattacharya and Singh (2008) obtain analytic solutions for an OLG model with two assets and logarithmic utility functions.…”

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confidence: 99%