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Friedman Rule in a Model with Endogenous Growth and Cash-in-advance Constraint

  • Firouz Gahvari

This paper introduces money into an overlapping generations model with endogenous growth. The model, due to Docquier et al. (2007), exhibits a positive intergenerational externality which precludes its laissez-fair equilibrium to be optimal even if the government can control the level of physical capital and set it to satisfy the modified golden rule. The main message of the paper is that, as long as the modified golden rule is attained, Friedman rule is optimal. The result holds regardless of the ability of the government to internalize the externality and control the level of human capital. Other results include: (i) violation of Friedman rule for a different second-best environment wherein human capital accumulation is controlled but not physical capital accumulation; (ii) existence of a negative relationship between money growth rate and the economy’s endogenous growth rate, and (iii) non-uniqueness of Friedman rule.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2708.

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Date of creation: 2009
Date of revision:
Handle: RePEc:ces:ceswps:_2708
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  1. Wang, Ping & Yip, Chong K., 1992. "Examining the long-run effect of money on economic growth," Journal of Macroeconomics, Elsevier, vol. 14(2), pages 359-369.
  2. CRETTEZ, Bertrand & MICHEL, Philippe & WIGNIOLLE, Bertrand, 1998. "Cash-in-advance constraints in the diamond overlapping generations model: neutrality and optimality of monetary policies," CORE Discussion Papers 1998005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  4. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
  5. Gahvari, Firouz, 2007. "The Friedman rule: Old and new," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 581-589, March.
  6. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-76, April.
  7. DOCQUIER, Frédéric & PADDISON, Oliver & PESTIEAU, Pierre, . "Optimal accumulation in an endogenous growth setting with human capital," CORE Discussion Papers RP 2021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Gahvari, Firouz, 1988. "Lump-sum taxation and the superneutrality and optimum quantity of money in life cycle growth models," Journal of Public Economics, Elsevier, vol. 36(3), pages 339-367, August.
  9. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  10. 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.
  11. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal Monetary Policy and Economic Growth," Staff General Research Papers 12413, Iowa State University, Department of Economics.
  12. van der Ploeg, Frederick & Alogoskoufis, George S, 1994. "Money and Endogenous Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 771-91, November.
  13. Crettez, Bertrand & Michel, Philippe & Wingniolle, Bertrand, 2002. " Optimal Monetary Policy, Taxes, and Public Debt in an Intertemporal Equilibrium," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 299-316.
  14. Larry E. Jones & Rodolfo E. Manuelli, 1993. "Growth and the Effects of Inflation," NBER Working Papers 4523, National Bureau of Economic Research, Inc.
  15. Peter N. Ireland, 2005. "The liquidity trap, the real balance effect, and the Friedman rule," Working Papers 05-3, Federal Reserve Bank of Boston.
  16. Beatrix Paal & Bruce D. Smith, 2013. "The sub-optimality of the Friedman rule and the optimum quantity of money," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 911-948, November.
  17. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2004. "The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?," Staff General Research Papers 11950, Iowa State University, Department of Economics.
  18. Philippe Michel & Bertrand Wigniolle, 2005. "Cash-in-advance constraints, bubbles and monetary policy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00268861, HAL.
  19. Juin-Jen Chang & Wen-Ya Chang & Ching-Chong Lai & Ping Wang, 2007. "Equilibrium Dynamics in an Endogenous Growth Model of Money and Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1683-1710, October.
  20. Chang, Wen-ya & Lai, Ching-chong, 2000. "Anticipated Inflation in a Monetary Economy with Endogenous Growth," Economica, London School of Economics and Political Science, vol. 67(267), pages 399-417, August.
  21. Freeman, Scott, 1993. "Resolving Differences over the Optimal Quantity of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 801-11, November.
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