Essay: Information on Time Value of Money

Sample Essay

In essence, it attempts to provide an essential in depth clarification of ‘three questions’ that the authors feel were left unanswered by Friedman. Firstly, whether the zero nominal interest rates are not only essential, but also whether they are sufficient to ‘ensure an optimal allocation of resources’ and what kind of monetary policies would be successful in their implementation of zero nominal interest rates. (Harold Cole & Narayana Kocherlakota, 1988).

Also, leading up to a concluding argument that the issue of ‘unique implementation’ should be addressed keeping in view different economic scenarios of equilibrium, where it should be considered what policy should be undertaken when  the central bank cannot ‘force individuals to coordinate on its desired equilibrium if other, less desirable equilibria are present.’ It uses the simple economic model with the only ‘main friction’ being the cash-in advance constraint, which then goes onto address the fact that positive nominal rates would act in a derogatory manner since the wage earners would have to wait to be able to use their current earnings to buy goods. This is because they tend to equate their marginal rate of substitution between the likes of consumption and leisure to the marginal product of labour that has been discounted by the time value of money. This means, essentially, that the only way to remove this discrepancy would be by eliminating the time value of money, which is the nominal interest rate to ‘zero in every period’.  (Harold Cole & Narayana Kocherlakota, 1988).

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