Abstract
The primary concern of this paper is understanding how prices and interest rates respond to open-market operations. In a model economy developed by Grossman and Weiss, but with more general utility functions, we establish global existence of equilibrium paths and observe that prices and interest rates rise initially, but thereafter oscillate around a new steady state. Also investigated are optimal monetary policies wherein injections take place in more than one time period and corresponding to which the equilibrium prices are most stable. Existence of such policies is established by mathematical analysis and its detailed structure explored by numerical simulation. Journal of Economic Literature Classification Numbers: E50, E52.
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