RWP 23-04, May 2023
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.
JEL classifications: E41, E5, E61, E71.
Faria, João Ricardo, and Peter McAdam. 2023. “Janus’s Money Demand and Time Inconsistency: A New Impossibility Theorem?” Federal Reserve Bank of Kansas City, Research Working Paper no. 23-04, May. Available at External Linkhttps://doi.org/10.18651/RWP2023-04