The issue of optimal monetary policy within a particular general equil
ibrium model of the monetary transmission mechanism is addressed. The
model analyzed is a member of the recent class of ''liquidity models''
of the monetary business cycle. The nature of the trading frictions t
hat define these models introduces a role for activist monetary policy
. In particular, to the extent that the central bank can adjust liquid
ity more rapidly than the private sector, there is a welfare-improving
role for monetary policy. In contrast to traditional policy prescript
ions for ''aggregate demand management,'' this is a prescription for '
'liquidity management.''