Friedman Rule in a Model with Endogenous Growth and Gash-in-Advance Constraint

40 Pages Posted: 22 Jul 2009

See all articles by Firouz Gahvari

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2009

Abstract

This paper introduces money into an overlapping generations model with endogenous growth. The model, due to Docquier et al. (2007), exhibits a positive intergenerational externality which precludes its laissez-fair equilibrium to be optimal even if the government can control the level of physical capital and set it to satisfy the modified golden rule. The main message of the paper is that, as long as the modified golden rule is attained, Friedman rule is optimal. The result holds regardless of the ability of the government to internalize the externality and control the level of human capital. Other results include: (i) violation of Friedman rule for a different second-best environment wherein human capital accumulation is controlled but not physical capital accumulation; (ii) existence of a negative relationship between money growth rate and the economy’s endogenous growth rate, and (iii) non-uniqueness of Friedman rule.

Keywords: Friedman rule, endogenous growth, investment in human capital, overlapping generations, second best

JEL Classification: H21, H52

Suggested Citation

Gahvari, Firouz, Friedman Rule in a Model with Endogenous Growth and Gash-in-Advance Constraint (July 2009). CESifo Working Paper Series No. 2708, Available at SSRN: https://ssrn.com/abstract=1437487

Firouz Gahvari (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

313 David Kinley Hall, 1407 West Gregory Drive
Urbana, IL 61801
United States

HOME PAGE: http://www.economics.illinois.edu/people/fgahvari

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
66
Abstract Views
671
rank
419,453
PlumX Metrics