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Optimal monetary policy with heterogeneous agents: a case for inflation

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  • Theodore Palivos

Abstract

This paper analyses the role of monetary policy in an overlapping-generations monetary growth model with two types of agents, who exhibit a different degree of altruism towards their descendants. It is shown that changes in the money growth rate have significant distributional effects. Furthermore, the optimal rate of monetary expansion is, in general, higher than the one implied by the Friedman rule and may, in fact, yield a small but positive rate of inflation, even though capital is invariant to changes in the money growth rate. Finally, this optimal rate of monetary expansion takes higher values as the society's aversion towards inequality increases. Copyright 2005, Oxford University Press.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:oxecpp:v:57:y:2005:i:1:p:34-50
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    File URL: http://hdl.handle.net/10.1093/oep/gpi007
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    Cited by:

    1. Oscar Mauricio Valencia, 2006. "Monetary Policy With Liquidity Frictions," DOCUMENTOS CEDE 003252, UNIVERSIDAD DE LOS ANDES-CEDE.
    2. Takemasa Oda, 2016. "Optimal Inflation Rate in a Life-Cycle Economy," IMES Discussion Paper Series 16-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal monetary policy and economic growth," European Economic Review, Elsevier, vol. 53(2), pages 210-221, February.
    4. Turdaliev, Nurlan, 2009. "Transparency in monetary policy: A general equilibrium approach," Economic Modelling, Elsevier, vol. 26(3), pages 608-613, May.
    5. Arbex, Marcelo & Turdaliev, Nurlan, 2011. "Optimal monetary and audit policy with imperfect taxation," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 327-340, June.
    6. Olivier Ledoit, 2011. "The redistributive effects of monetary policy," ECON - Working Papers 044, Department of Economics - University of Zurich.

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