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GOVERNMENT POLICY IN MONETARY ECONOMIES

Authors

  • Fernando M. Martin

    1. Federal Reserve Bank of St. Louis, U.S.A., and Simon Fraser University, Canada
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    • I thank Gabriele Camera and two anonymous referees for helpful comments and suggestions. I gratefully acknowledge financial support from the SFU/SSHRC Institutional Grants Committee. Preliminary results of this article were presented at the 2009 Chicago Fed Summer Workshop on Money, Banking, Payment and Finance. The views expressed in this article do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. Please address correspondence to: Fernando M. Martin, Department of Research Division, Federal Reserve Bank of St. Louis, 1421 Dr. Martin Luther King Dr., St Louis, MO 63106-3716. Phone: 314-444-7350. Fax: 314-444-8731. E-mail: fernando.m.martin@stls.frb.org.


  • Manuscript received September 2010; revised September 2011.

Abstract

I study how the general and specific details of a micro-founded monetary framework affect the determination of policy when the government has limited commitment. In the general framework, policy is determined by the interaction between the incentives to smooth distortion intertemporally and a time-consistency problem. Resolving financial and trading frictions affects long-run policy significantly. Policy response to fluctuations in productivity is quantitatively different across model variants, mainly due to the idiosyncratic behavior of the money demand. Other types of shocks, both transitory and permanent, affect policy in a similar manner across a variety of specifications.

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