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Monetary policy rules in an OLG model with non-superneutral money

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  • von Thadden, Leopold

Abstract

This paper considers an overlapping generations economy with capital accumulation and two outside assets (government bonds, fiat money) and compares the dynamic properties of two stylized monetary policy rules: (i) a constant money growth rule and (ii) an interest rate targeting rule which allows for an endogenous feedback to inflation. The results of this comparison depend strongly on whether under the overall monetary-fiscal regime long-run real interest rates are independent of inflation. If this is the case (i.e. superneutrality prevails) there exists in our model a unique and stable steady state under either monetary policy rule. By contrast, if superneutrality fails there is scope for much richer dynamics, characterized by multiple steady states and globally indeterminate dynamics. The paper offers a classification of such constellations and argues that under both monetary policy rules uniqueness and stability of steady states can be restored, provided the long-run inflation target and the feedback of the interest rate targeting rule are appropriately chosen.

Suggested Citation

  • von Thadden, Leopold, 2012. "Monetary policy rules in an OLG model with non-superneutral money," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 147-166.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:1:p:147-166
    DOI: 10.1016/j.jmacro.2011.09.007
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    More about this item

    Keywords

    Monetary policy; Fiscal regimes; Overlapping generations;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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