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The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?

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  • Bhattacharya, Joydeep
  • Haslag, Joseph
  • Russell, Steven

Abstract

In models of money with an infinitely-lived representative agent (ILRA models), the optimal monetary policy is almost always the Friedman rule. Overlapping generations (OG) models are different: in this paper, we study how they are different, and why. We investigate the welfare properties of monetary policy in a simple OG model under two different types of money demand specifications and under two alternative assumptions about the generational timing of taxes for money retirement. We find that the Friedman rule is generally not the policy that maximizes steady-state utility. We conclude that the key difference between ILRA and OG monetary models is that in the latter, the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers. Overlapping generations are different in this regard; we study how they are different and why.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p1845-2004-04-01.pdf
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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 11950.

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Date of creation: 01 Apr 2004
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Publication status: Published in Journal of Monetary Economics, November 2005, vol. 52 no. 8, pp. 1401-1433
Handle: RePEc:isu:genres:11950

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Keywords: Friedman rule; optimal monetary policy; overlapping generations model; money; intergenerational transfers;

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