Document Type

Working Paper

Publication Date


Working Paper Number

WP #05025, September 2005 revised April 2006; Old working paper #12413


This paper studies a 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 preferences, irrespective of the degree of risk aversion, we also show that for some positive inflation to be optimal and for the Friedman rule to be sub-optimal, it is sufficient (but not necessary) that there be a mild degree of social increasing returns

Publication Status

Published in European Economic Review, Vol. 53 no. 2 (February 2009): 210-221.

JEL Classification

E31, E51, E58

File Format



27 pages

File Function

This draft: April 2006 (Original version: September 2005)

Included in

Economics Commons