Optimal Monetary Policy and Economic Growth

26 Pages Posted: 7 Nov 2005 Last revised: 10 Jun 2010

See all articles by Joydeep Bhattacharya

Joydeep Bhattacharya

Iowa State University - Department of Economics

Joseph Haslag

University of Missouri at Columbia - Department of Economics

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Date Written: August 1, 2006

Abstract

This paper studies an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money. We assume a production function with a knowledge externality (Romer-style) that nests economies with endogenous growth (AK form) and those with no long-run growth (the Diamond model). We show that the Tobin effect is always operative. Under CRRA (constant relative risk aversion) preferences, a mild degree of social increasing returns is sufficient (but not necessary) for some positive inflation to dominate zero inflation and for the Friedman rule to be suboptimal, irrespective of the degree of risk aversion.

Keywords: Friedman rule, Tobin effect, monetary policy

JEL Classification: E31, E51, E58

Suggested Citation

Bhattacharya, Joydeep and Haslag, Joseph and Martin, Antoine, Optimal Monetary Policy and Economic Growth (August 1, 2006). FRB of New York Staff Report No. 224, Available at SSRN: https://ssrn.com/abstract=839785 or http://dx.doi.org/10.2139/ssrn.839785

Joydeep Bhattacharya

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
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Joseph Haslag

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

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New York, NY 10045
United States
212-720-6943 (Phone)