TY  - JOUR
AU  - Rebelo,Sergio
AU  - Xie,Danyang
TI  - On the Optimality of Interest Rate Smoothing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5947
PY  - 1997
Y2  - February 1997
UR  - http://www.nber.org/papers/w5947
L1  - http://www.nber.org/papers/w5947.pdf
N1  - Author contact info:
Sergio Rebelo
Northwestern University
Kellogg School of Management
Department of Finance
Leverone Hall
Evanston, IL  60208-2001
Tel: 847/467-2329
Fax: 847/491-5719
E-Mail: s-rebelo@northwestern.edu

Danyang Xie
Department of Economics
Hong Kong University of
Science & Technology
Clear Water Bay, Kowloon, HONG KONG
Tel: fax 852-2358-2084
E-Mail: dxie@ust.hk
AB  - This paper studies some continuous-time cash-in-advance models in which interest rate smoothing is optimal.   We consider both deterministic and stochastic models.  In the stochastic case we obtain two results of independent interest: (i) we study what is, to our knowledge, the only version of the neoclassical model under uncertainty that can be solved in closed form in continuous time; and (ii) we show how to characterize the competitive equilibrium of a stochastic continuous time model that cannot be computed by solving a planning problem.  We also discuss the scope for monetary policy to improve welfare in an economy with a suboptimal real competitive equilibrium, focusing on the particular example of an economy with externalities.
ER  -