This paper explores monetary policy decision-making within an insurance model with expected utility-maximizing policy-makers. The authors consider that policy-makers are different in terms of their backgrounds, experience and skills and they may disagree on the appropriate policy response. In a monetary policy committee, they share information and decide on interest rates by means of an agreed ...

This paper incorporates a distortionary tax into a microfoundations of money framework and revisits the optimum quantity of money. The money constraint in the decentralized market plays a key role in the optimal policy. Only if the constraint is binding can fiscal policy alter the agents’ surplus shares; monetary, but not fiscal, policy affects the agents’ bargaining position, leaving a special...

Following the damaging real effects of asset price fluctuations over the recent financial crisis, the debate on the appropriate role of such prices in a monetary policy context has gained renewed attention. This paper argues that a direct monetary policy response to asset prices is not desirable under common instrumental rate rules. To illustrate this point, we build an adaptive learning model,...

Financial frictions and financial shocks can affect the trade-off between inflation stabilization and output-gap stabilization faced by a central bank. Financial frictions lead to a greater response in output following any deviation of inflation from target and thus lead to an increase in the sacrifice ratio. As a result, optimal monetary policy in the face of credit frictions is to allow great...

In many countries, the monetary policy instrument remains unchanged for a long period and shows infrequent responses to exogenous shocks. The purpose of this paper is to provide a new explanation on why the central bank’s policy instrument remains so unchanged. In the following analysis, we explore how Knightian uncertainty affects optimal monetary policy. We apply the Choquet expected decision...

We study optimal monetary policy in a NewMonetarist framework with banking, private liquidity, and credit frictions.We show that whenever part of the decentralized transactions are allowed to use deposit claims backed by interest-bearing assets, the optimal policy is a non-Friedman-rule liquidity trap. In contrast, the Friedman rule is optimal if there are no credit frictions, or if the economy...