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Janus's Money Demand and Time Inconsistency: A New Impossibility Theorem?

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Abstract

We derive a general “Janus” money demand function that reflects backward- and forward-looking habit formation. The scope of our model allows us to explain the breakdown of money-demand functions and reduced policy relevance of monetary aggregates. Integrating our Janus money demand into a Barro-Gordon framework reveals new insights for time inconsistency in monetary policy and a new impossibility theorem.

Suggested Citation

  • João Ricardo Faria & Peter McAdam, 2023. "Janus's Money Demand and Time Inconsistency: A New Impossibility Theorem?," Research Working Paper RWP 23-04, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:96358
    DOI: 10.18651/RWP2023-04
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    More about this item

    Keywords

    money demand; monetary policy; impossibility theorem;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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