OPTIMAL MONETARY-POLICY IN A CASH-IN-ADVANCE ECONOMY

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.''