Optimal Monetary Policy and Economic Growth
26 Pages Posted: 7 Nov 2005 Last revised: 10 Jun 2010
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Inflation and the Great Ratios: Long-Term Evidence from the U.S.
By Shaghil Ahmed and John H. Rogers
-
Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model
-
The Demand for Bank Reserves and Other Monetary Aggregates
By Max Gillman and Michal Kejak
-
By Max Gillman and Anton Nakov
-
Price Liberalization, Money Growth, and Inflation During the Transition to a Market Economy
-
Granger Causality of the Inflation-Growth Mirror in Accession Countries
By Max Gillman and Anton Nakov
-
Inflation and Growth: Some Theory and Evidence
By Max Gillman, Mark N. Harris, ...