The Tobin effect and the Friedman rule
AbstractThis paper addresses whether the Friedman rule can be optimal in an economy in which the Tobin effect is operative. We present an overlapping generations economy with capital in which limited communication and stochastic relocation create an endogenous transaction 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). With logarithmic utility, the "anti-Tobin effect" is operative, and the Friedman rule is optimal (that is, stationary-welfare-maximizing) regardless of whether or not there is long-run growth. Under the more general CRRA (constant relative risk aversion) form of preferences, we show that an operative anti-Tobin effect is a sufficient condition for the Friedman rule to be optimal. Also, contrary to models with linear storage technologies, our model shows that zero inflation is not optimal.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 224.
Date of creation: 2005
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-05 (All new papers)
- NEP-DGE-2005-11-05 (Dynamic General Equilibrium)
- NEP-FIN-2005-11-05 (Finance)
- NEP-MAC-2005-11-05 (Macroeconomics)
- NEP-MON-2005-11-05 (Monetary Economics)
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