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

A new model of money demand incorporates consumers’ past and future habits to shed light on time inconsistency in monetary policy.

May 11, 2023

Monetary Policy

Macroeconomics

Research Working Paper

by: João Ricardo and Peter McAdam

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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.

Article Citation

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

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