Gaps and Triangles
32 Pages Posted: 28 Feb 2001
There are 2 versions of this paper
Date Written: February 2001
Abstract
We derive principles of optimal short run monetary policy in a real business cycles model, with money and with monopolistic firms that set prices one period in advance. The only distortionary policy intruments are the nominal interest rates and the money supplies. In this environment it is feasible to undo both the cash in advance and the price setting restrictions. We show that the optimal allocation is achieved under the Friedman rule. We also show that, in general, it is not optimal to undo the restriction that prices are set one period in advance. Sticky prices provide the planner with tools to improve upon a distorted flexible prices allocation.
Keywords: Friedman Rule, Optimal Cyclical Monetary Policy, Prices Set in Advance
JEL Classification: E31, E41, E58, E62
Suggested Citation: Suggested Citation
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