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Anticipation of Future Consumption: A Monetary Perspective

Authors


  • We thank two anonymous referees, editor Paul Evans, Jean-Pascal Bénassy, Engelbert Dockner, Gabriel Fagan, Christian Groth, Jakub Growiec, Miguel León-Ledesma, Paul Levine, Masao Nakagawa, Xavier Ragot, Adolfo Sachsida, Oreste Tristani, Chris Tsoukis, Philippe Weil, Peter Welz, and Alpo Willman for comments as well as seminar participants at Surrey, the ECB, and at the Bank of Korea.

Abstract

We adapt the monetary model (Sidrauski 1967) to study the hypothesis of anticipation of future consumption. We assume that anticipation of future consumption affects an agent’s instantaneous utility and that all effects of future consumption on current well-being are captured by the stock of future consumption. Monetary policy effectiveness is thereby reduced and a zero nominal lower interest rate (and thus the Friedman rule) is destabilizing. Given this, we can derive a “just stable” equilibrium nominal interest rate with matching definitions for inflation and monetary growth. We demonstrate that these implied lower bounds match their historical analogues well.

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