Sequential markets and the suboptimality of the Friedman rule Public Deposited

Creator Series Date Created
  • 1994-12
  • A cash-in-advance model with sequential markets is constructed, where unanticipated monetary injections are nonneutral and can potentially produce large liquidity effects. However, if the monetary authority adheres to an optimal money rule, money should not respond to unanticipated shocks, so that a Friedman rule is suboptimal and the monetary authority does not exploit the liquidity effect. Quantitatively, the model can generate variability in money and nominal interest rates close to what is observed, and can produce data with no obvious evidence of the existence of liquidity effects.

Subject (JEL) Keyword Date Modified
  • 04/09/2018
Corporate Author
  • Federal Reserve Bank of Minneapolis. Research Department.
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