Working Paper

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

Abstract: 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.

Keywords: money demand; monetary policy; impossibility theorem;

JEL Classification: E41; E5; E61; E71;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2023-05-11

Number: RWP 23-04