On the optimality of eliminating seasonality in nominal interest rates

Optimal monetary policy for an economy with seasonal fluctuations and a cash-in-advance requirement on the purchase of consumption goods is studied. It is shown that the short delay in the availability of newly acquired funds for consumption purchases (the hallmark of cash-in-advance models) typically makes the seasonal steady state inefficient. It is also shown that monetary policy can overcome this inefficiency by keeping the nominal interest rate constant over the seasons. An analytical model is also presented to explore the effects of seasonal smoothing of nominal interest rates on the seasonal amplitude of other closely related variables.