Stabilizing monetary-injection policies

The primary concern of this paper is understanding how prices and interest rates respond to open-market operations. In a model economy developed by Gr ossman and Weiss, but with more general utility functions, we establish glo bal existence of equilibrium paths and observe that prices and interest rat es rise initially, but thereafter oscillate around a new steady state. Also investigated are optimal monetary policies wherein injections take place i n more than one time period and corresponding to which the equilibrium pric es are most stable. Existence of such policies is established by mathematic al analysis and its detailed structure explored by numerical simulation. (C ) 2001 Academic Press.