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Optimal monetary policy and economic growth

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

Abstract

A question at the center of many analyses of optimal monetary policy is, why do central banks never implement the Friedman rule? To the list of answers to this question, we add neoclassical production (specifically, the Tobin effect) as one possible explanation. To that end, we study an 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). The Tobin effect is shown to be always operative. Under CRRA preferences, a mild degree of social increasing returns is sufficient (but not necessary) for some positive inflation to dominate zero inflation and for the Friedman rule to be sub-optimal, irrespective of the degree of risk aversion.

Suggested Citation

  • Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal monetary policy and economic growth," European Economic Review, Elsevier, vol. 53(2), pages 210-221, February.
  • Handle: RePEc:eee:eecrev:v:53:y:2009:i:2:p:210-221
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    2. Ryoji Hiraguchi, 2014. "Optimal Monetary Policy in OLG Models with Long-Lived Agents: A Note," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 164-172, February.
    3. Eisei Ohtaki, 2016. "Optimality of the Friedman rule under ambiguity," Working Papers e103, Tokyo Center for Economic Research.
    4. Edgar A. Ghossoub & Robert R. Reed, 2019. "Banking competition, production externalities, and the effects of monetary policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 91-154, February.
    5. Wan, Jing & Zhang, Jie, 2016. "Money and growth through innovation cycles with leisure," Economics Letters, Elsevier, vol. 148(C), pages 23-26.
    6. Masaya Shintani & Masaya Yasuoka, 2019. "Fertility, Inequality and Income Growth," Discussion Paper Series 187, School of Economics, Kwansei Gakuin University.
    7. Tetsuo Ono, 2020. "Fiscal rules in a monetary economy: Implications for growth and welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(1), pages 190-219, February.
    8. Firouz Gahvari, 2012. "The Friedman Rule in a Model with Endogenous Growth and Cash-in-Advance Constraint," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 787-823, August.
    9. Wang, Gaowang & Zou, Heng-fu, 2011. "Inflation aversion and macroeconomic policy in a perfect foresight monetary model," Economic Modelling, Elsevier, vol. 28(4), pages 1802-1807, July.
    10. Masaya Yasuoka, 2018. "Money and Pay-As-You-Go Pension," Economies, MDPI, Open Access Journal, vol. 6(2), pages 1-15, March.
    11. Firouz Gahvari, 2009. "Friedman Rule in a Model with Endogenous Growth and Cash-in-advance Constraint," CESifo Working Paper Series 2708, CESifo.
    12. Tarishi Matsuoka, 2011. "Monetary Policy and Banking Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1109-1129, September.
    13. Masaya Yasuoka, 2018. "Fertility, Income Growth and Inflation," Discussion Paper Series 182, School of Economics, Kwansei Gakuin University, revised Jul 2018.
    14. Hiraguchi Ryoji, 2017. "Optimal Monetary Policy in an Overlapping Generations Model with Search Theoretic Monetary Exchange," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 17(2), pages 1-14, June.
    15. Tarishi Matsuoka, 2011. "Monetary Policy and Banking Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1109-1129, September.

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    More about this item

    Keywords

    Friedman rule Tobin effect Monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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