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Optimal Monetary Policy and Economic Growth

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  • Bhattacharya, Joydeep
  • Haslag, Joseph
  • Martin, Antoine

Abstract

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

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p1759-2005-09-01.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 12413.

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Date of creation: 01 Jan 2009
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Publication status: Published in European Economic Review 2009, vol. 53 no. 2, pp. 210-221
Handle: RePEc:isu:genres:12413

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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; Tobin effect; monetary policy;

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References

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  1. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, Elsevier, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012 Elsevier.
  2. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, And The Friedman Rule," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, 05.
  3. Theodore Palivos, 1999. "Optimal Monetary Policy with Heterogeneous Agents: Is There a Case for Inflation?," Computing in Economics and Finance 1999, Society for Computational Economics 353, Society for Computational Economics.
  4. Maxim Nikitin & Steven Russell, 2006. "Monetary policy arithmetic: reconciling theory with evidence," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 39(1), pages 348-374, February.
  5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  6. Beatrix Paal & Bruce D. Smith, 2001. "The sub-optimality of the Friedman rule and the optimum quantity of money," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0113, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  7. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  8. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 954-71, December.
  9. Gaetano Antinolfi & Elisabeth Huybens & Todd Keister, 2000. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Working Papers, Centro de Investigacion Economica, ITAM 0001, Centro de Investigacion Economica, ITAM.
  10. Stacey L. Schreft & Bruce D. Smith, 1994. "The effects of open market operations in a model of intermediation and growth," Working Paper, Federal Reserve Bank of Richmond 94-10, Federal Reserve Bank of Richmond.
  11. Theodore Palivos, 2005. "Optimal monetary policy with heterogeneous agents: a case for inflation," Oxford Economic Papers, Oxford University Press, vol. 57(1), pages 34-50, January.
  12. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  13. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 128-134, May.
  14. R. Todd Smith, 1998. "The Friedman Rule and Optimal Monetary Policy," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 31(2), pages 295-302, May.
  15. Joe Haslag & Joydeep Bhattacharya & Steven Russell, 2003. "Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?," Working Papers, Department of Economics, University of Missouri 0301, Department of Economics, University of Missouri.
  16. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, Econometric Society, vol. 48(3), pages 565-76, April.
  17. Dutta, Jayasri & Kapur, Sandeep, 1998. "Liquidity Preference and Financial Intermediation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(3), pages 551-72, July.
  18. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262232316, December.
  19. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  20. Walsh, Carl E, 2003. " Accountability, Transparency, and Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(5), pages 829-49, October.
  21. Bhattacharya, Joydeep & Haslag, Joseph H. & Martin, Antoine, 2006. "Sub-optimality of the Friedman rule in Townsend's turnpike and stochastic relocation models of money: Do finite lives and initial dates matter?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(5), pages 879-897, May.
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Citations

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Cited by:
  1. Wang, Gaowang & Zou, Heng-fu, 2011. "Inflation aversion and macroeconomic policy in a perfect foresight monetary model," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1802-1807, July.
  2. Tarishi Matsuoka, 2011. "Monetary Policy and Banking Structure," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(6), pages 1109-1129, 09.
  3. Firouz Gahvari, 2009. "Friedman Rule in a Model with Endogenous Growth and Cash-in-advance Constraint," CESifo Working Paper Series 2708, CESifo Group Munich.

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