In the absence of monetary superneutrality, inflation affects capital accumulation and the demand for real balances. This paper derives the combination of monetary and lump-sum fiscal policy which maximizes the sum of discounted utilities of representative consumers in present and future generations. Under the optimal policy package, the steady state has a zero nominal interest rate and has monetary contraction at the rate of intergenerational discount. As the rate of intergenerational discount rate approaches zero, optimal policy maximizes steady state utility of the representative consumer. In this case, the optimal steady state is characterized by a constant nominal money supply.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
2136.
Length: Date of creation: Oct 1987 Date of revision: Handle: RePEc:nbr:nberwo:2136
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