Government Policy in Monetary Economies

33 Pages Posted: 24 Jan 2013

See all articles by Fernando M. Martin

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 2 versions of this paper

Date Written: February 2013


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.

Suggested Citation

Martin, Fernando M., Government Policy in Monetary Economies (February 2013). International Economic Review, Vol. 54, Issue 1, pp. 185-217, 2013, Available at SSRN: or

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