Title

Optimal monetary policy and economic growth

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2-2009

Journal or Book Title

European Economic Review

Volume

53

Issue

2

First Page or Article ID Number

210

Last Page

221

DOI

10.1016/j.euroecorev.2008.03.003

Abstract

A question at the center of many analyses of optimal monetary policy is, why do central banks never implement the Friedman rule? To the list of answers to this question, we add neoclassical production (specifically, the Tobin effect) as one possible explanation. To that end, we study 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). The Tobin effect is shown to be always operative. Under CRRA 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 sub-optimal, irrespective of the degree of risk aversion.

JEL Classification

E31, E51, E58

Comments

This article is published as 18. Optimal Monetary Policy and Economic Growth (with A.Martin and J. Haslag), European Economic Review, 53(2), 210-221, 2009. DOI: 10.1016/j.euroecorev.2008.03.003. Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version Working Paper

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