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An Attractive Monetary Model with Surprising Implications for Optima: Two Examples

Quarterly Review 3611 | Published March 1, 2014

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Neil Wallace

An Attractive Monetary Model with Surprising Implications for Optima: Two Examples

Abstract

Ex ante optima are described for two examples of a monetary model with random meetings, some perfectly monitored people, and some nonmonitored people. One example describes optimal inflation, the other optimal seasonal policy. Although the numerical examples are arbitrary in most respects, the results are consistent with three general conclusions: if the model is known, then intervention is desirable; even the qualitative aspects of optimal intervention are not obvious; and optimal intervention depends on the details of the model. The results are therefore reminiscent of the conclusions of second-best theory.