Abstract
This paper studies some continuous-time cash-in-advance models in which interest rate smoothing is optimal. We consider both deterministic and stochastic models. In the stochastic case we obtain two results of independent interest: (i) we study what is, to our knowledge, the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time; and (ii) we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem. We also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium, focusing on the particular example of an economy with externalities.
Original language | English (US) |
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Pages (from-to) | 263-282 |
Number of pages | 20 |
Journal | Journal of Monetary Economics |
Volume | 43 |
Issue number | 2 |
DOIs | |
State | Published - Apr 1999 |
Keywords
- E31
- E48
- E52
- Growth
- Inflation
- Interest rate smoothing
- Monetary policy
- O42
ASJC Scopus subject areas
- Finance
- Economics and Econometrics