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Growth in Monetary Economies: Steady-State Analysis of Monetary Policy

In: Economic Growth

Author

Listed:
  • Alfonso Novales

    (Complutense University of Madrid)

  • Esther Fernández

    (Complutense University of Madrid)

  • Jesús Ruiz

    (Complutense University of Madrid)

Abstract

In this chapter we characterize optimal growth in a monetary economy, using the steady-state optimality conditions to analyze alternative designs for monetary policy. We introduce the concept of optimal steady-state rate of inflation and characterize conditions under which Friedman’s prescription for a zero nominal interest rate can be optimal. Steady-state optimality conditions are used to characterize the feasible combinations of monetary and fiscal policies. A numerical exercise is used to evaluate the welfare implications of alternative monetary policies. In another exercise, the reader will see the existence of a Laffer curve in this economy. The chapter closes with a characterization of optimal monetary policy in a dynamic Ramsey model, which takes into consideration the short- as well as the long-run effects of a policy intervention.

Suggested Citation

  • Alfonso Novales & Esther Fernández & Jesús Ruiz, 2022. "Growth in Monetary Economies: Steady-State Analysis of Monetary Policy," Springer Texts in Business and Economics, in: Economic Growth, edition 3, chapter 8, pages 411-460, Springer.
    • Handle: RePEc:spr:sptchp:978-3-662-63982-5_8
    DOI: 10.1007/978-3-662-63982-5_8
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