JP comments on my last post commenting on his post, and this post responds.
He notes that while a technological innovation that reduces the need for money, or the liquidity and convenience services that come from holding money, would have no effect on the actual marginal liquidity services enjoyed at a point when interest rates are zero, [because zero rates means that people are sated with money], nevertheless, if rates are expected to rise in the future, something will happen to future money demand. But what?
Without doing it properly [read with pencil, paper and Matlab], I can’t know for sure. But, at a guess, not much in the NK model. Technological innovation will reduce real money demand at all levels of interest rates. The central bank will follow through with any previously computed optimal trajectory for nominal interest rates following [eg] a shock to the natural rate, but will note that this rate leads to lower money balances throughout. Those lower money balances would have no other consequence in this model, however.