IDEAS home Printed from https://ideas.repec.org/p/ube/dpvwib/dp2013.html
   My bibliography  Save this paper

Liquidity, the Mundell-Tobin Effect, and the Friedman Rule

Author

Listed:
  • Lukas Altermatt
  • Christian Wipf

Abstract

We investigate how the Mundell-Tobin effect, i.e., a positive relation between in flation and capital investment, changes the optimal monetary policy prescription in a framework that combines overlapping generations and new monetarist models. We find that the Friedman rule is optimal if and only if there is no Mundell-Tobin effect. A Mundell-Tobin effect is more likely to occur at the Friedman rule if capital is relatively liquid, and if the agents' risk aversion is relatively low. If the Friedman rule is not optimal, the optimal money growth rate lies between the Friedman rule and a constant money stock. We also show that it is more efficient to implement de flationary monetary policies by raising lump-sum taxes on old agents only.

Suggested Citation

  • Lukas Altermatt & Christian Wipf, 2020. "Liquidity, the Mundell-Tobin Effect, and the Friedman Rule," Diskussionsschriften dp2013, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp2013
    as

    Download full text from publisher

    File URL: https://repec.vwiit.ch/dp/dp2013.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Joseph H. Haslag & Antoine Martin, 2007. "Optimality of the Friedman Rule in an Overlapping Generations Model with Spatial Separation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1741-1758, October.
    2. Jean-Michel Grandmont & Yves Younes, 1973. "On the Efficiency of a Monetary Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(2), pages 149-165.
    3. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    4. Lukas Altermatt, 2022. "Inside Money, Investment, And Unconventional Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1527-1560, November.
    5. Abel, Andrew B., 1987. "Optimal monetary growth," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 437-450, May.
    6. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2005. "The role of money in two alternative models: When is the Friedman rule optimal, and why?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1401-1433, November.
    7. Gomis-Porqueras, Pedro & Huangfu, Stella & Sun, Hongfei, 2020. "The role of search frictions in the long-run relationships between inflation, unemployment and capital," European Economic Review, Elsevier, vol. 123(C).
    8. Wright, Randall & Xiao, Sylvia Xiaolin & Zhu, Yu, 2018. "Frictional capital reallocation I: Ex ante heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 100-116.
    9. Aruoba, S. Boragan & Chugh, Sanjay K., 2010. "Optimal fiscal and monetary policy when money is essential," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1618-1647, September.
    10. Schreft, Stacey L & Smith, Bruce D, 2002. "The Conduct of Monetary Policy with a Shrinking Stock of Government Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 848-882, August.
    11. Huber, Samuel & Kim, Jaehong, 2020. "An overlapping generations model for monetary policy analysis," European Economic Review, Elsevier, vol. 125(C).
    12. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    13. Schmitt-Grohé, Stephanie & Uribe, Martín, 2010. "The Optimal Rate of Inflation," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 13, pages 653-722, Elsevier.
    14. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
    15. Sanches, Daniel & Williamson, Stephen, 2010. "Money and credit with limited commitment and theft," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1525-1549, July.
    16. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, vol. 142(1), pages 247-258, September.
    17. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
    18. Andolfatto, David & Berentsen, Aleksander & Waller, Christopher, 2016. "Monetary policy with asset-backed money," Journal of Economic Theory, Elsevier, vol. 164(C), pages 166-186.
    19. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
    20. Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71(3), pages 280-280.
    21. Bruce Smith, 2003. "Taking intermediation seriously," Proceedings, Federal Reserve Bank of Cleveland, pages 1319-1377.
    22. Freeman, Scott, 1993. "Resolving Differences over the Optimal Quantity of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 801-811, November.
    23. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-971, December.
    24. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-576, April.
    25. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    26. Randall Wright & Xiaolin Xiao & Yu Zhu, 2018. "Frictional Capital Reallocation II: Ex Post Heterogeneity," 2018 Meeting Papers 544, Society for Economic Dynamics.
    27. Azariadis, Costas & Smith, Bruce D, 1996. "Private Information, Money, and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect," Journal of Economic Growth, Springer, vol. 1(3), pages 309-332, September.
    28. Benjamin M. Friedman & Michael Woodford (ed.), 2010. "Handbook of Monetary Economics," Handbook of Monetary Economics, Elsevier, edition 1, volume 3, number 3.
    29. Stephen D. Williamson, 2012. "Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach," American Economic Review, American Economic Association, vol. 102(6), pages 2570-2605, October.
    30. Zhu, Tao, 2008. "An overlapping-generations model with search," Journal of Economic Theory, Elsevier, vol. 142(1), pages 318-331, September.
    31. Altermatt, Lukas, 2019. "Savings, asset scarcity, and monetary policy," Journal of Economic Theory, Elsevier, vol. 182(C), pages 329-359.
    32. Bruce D. Smith, 2002. "Monetary Policy, Banking Crises, and the Friedman Rule," American Economic Review, American Economic Association, vol. 92(2), pages 128-134, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pedro Gomis‐Porqueras & Christopher Waller, 2022. "Optimal Taxes under Private Information: The Role of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 1941-1969, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pedro Gomis‐Porqueras & Christopher Waller, 2022. "Optimal Taxes under Private Information: The Role of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 1941-1969, October.
    2. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2005. "The role of money in two alternative models: When is the Friedman rule optimal, and why?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1401-1433, November.
    3. Altermatt, Lukas & Iwasaki, Kohei & Wright, Randall, 2021. "Asset pricing in monetary economies," Journal of International Money and Finance, Elsevier, vol. 115(C).
    4. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    5. Athanasios Geromichalos & Lucas Herrenbrueck, 2022. "The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 134-167, July.
    6. 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, vol. 46(2), pages 437-454, May.
    7. Lukas Altermatt & Kohei Iwasaki & Randall Wright, 2023. "General Equilibrium with Multiple Liquid Assets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 267-291, December.
    8. 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, vol. 30(5), pages 879-897, May.
    9. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    10. Altermatt, Lukas, 2019. "Savings, asset scarcity, and monetary policy," Journal of Economic Theory, Elsevier, vol. 182(C), pages 329-359.
    11. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Discussion Paper 2021-020, Tilburg University, Center for Economic Research.
    12. Matsuoka, Tarishi & Watanabe, Makoto, 2019. "Banking crises and liquidity in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    13. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Other publications TiSEM daabe114-81fa-44fc-aafd-b, Tilburg University, School of Economics and Management.
    14. Joseph H. Haslag & Antoine Martin, 2007. "Optimality of the Friedman Rule in an Overlapping Generations Model with Spatial Separation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1741-1758, October.
    15. Peter N. Ireland, 2005. "The Liquidity Trap, The Real Balance Effect, And The Friedman Rule ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1271-1301, November.
    16. Machicado, Carlos Gustavo, 2008. "Liquidity shocks and the dollarization of a banking system," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 369-381, March.
    17. Jung, Kuk Mo, 2018. "Uncertainty-induced dynamic inefficiency and the optimal inflation rate," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 486-506.
    18. Lukas Altermatt, 2022. "Inside Money, Investment, And Unconventional Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1527-1560, November.
    19. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    20. Wright, Randall & Xiao, Sylvia Xiaolin & Zhu, Yu, 2018. "Frictional capital reallocation I: Ex ante heterogeneity," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 100-116.

    More about this item

    Keywords

    New monetarism; overlapping generations; optimal monetary policy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ube:dpvwib:dp2013. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Franz Koelliker (email available below). General contact details of provider: https://edirc.repec.org/data/vwibech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.