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Asymmetric liquidity shocks and optimal monetary policy

Author

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  • Eisei Ohtaki

    (Faculty of Economics, Kanagawa University, Japan)

Abstract

This article develops an OLG model with random relocations of agents among more-than-two islands, wherein asymmetric liquidity shocks are observed. The model exhibits suboptimality of the Friedman rule. Furthermore, it is shown that there is no room for monetary policy to improve social welfare when the number of locations is extremely large. This article then shows that the discount window policy achieves an optimal allocation.

Suggested Citation

  • Eisei Ohtaki, 2014. "Asymmetric liquidity shocks and optimal monetary policy," Economics Bulletin, AccessEcon, vol. 34(2), pages 1068-1080.
    • Handle: RePEc:ebl:ecbull:eb-13-00591
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I2-P99.pdf
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    References listed on IDEAS

    as
    1. Joseph H. Haslag & Antoine Martin, 2007. "Optimality of the Friedman Rule in an Overlapping Generations Model with Spatial Separation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1741-1758, October.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    3. Schreft, Stacey L & Smith, Bruce D, 2002. "The Conduct of Monetary Policy with a Shrinking Stock of Government Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 848-882, August.
    4. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    5. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, vol. 92(2), pages 128-134, May.
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    Cited by:

    1. Eisei Ohtaki, 2016. "Optimality of the Friedman rule under ambiguity," Working Papers e103, Tokyo Center for Economic Research.

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    More about this item

    Keywords

    Money; Friedman rule; Discount window policy; Spatial separation; Overlapping generations model.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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