Andolfatto, David (2007): Incentives and the Limits to Deflationary Policy.
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I study a version of the Lagos-Wright (2005) model for which the Friedman rule is always a desirable policy, but where implementation may be constrained by the need to respect incentive-feasibility. In the environment I consider, incentives are distorted owing to private information and limited commitment. I demonstrate that a monetary economy can overcome the former friction, but not necessarily the latter. When this is so, there is an incentive-induced lower bound to the rate of deflation away from the Friedman rule. There are also circumstances in which the best incentive-feasible monetary policy may entail a strictly positive rate of inflation. This will be the case, for example, if agents are sufficiently impatient or if there are rapidly diminishing returns to production.
|Item Type:||MPRA Paper|
|Institution:||Simon Fraser University|
|Original Title:||Incentives and the Limits to Deflationary Policy|
|Keywords:||Money; Memory; Incentives; Friedman Rule|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
E - Macroeconomics and Monetary Economics > E0 - General
|Depositing User:||David Andolfatto|
|Date Deposited:||02. Sep 2007|
|Last Modified:||12. Feb 2013 11:36|
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