Friedman Rule in a Model with Endogenous Growth and Cash-in-advance Constraint
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.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Larry E. Jones & Rodolfo E. Manuelli, 1993.
"Growth and the Effects of Inflation,"
NBER Working Papers
4523, National Bureau of Economic Research, Inc.
- 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.
- Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2005. "The role of money in two alternative models: When is the Friedman rule optimal, and why?," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1401-1433, November.
- Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009.
"Optimal Monetary Policy and Economic Growth,"
Staff General Research Papers
12413, Iowa State University, Department of Economics.
- 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).
- Crettez, Bertrand & Michel, Philippe & Wigniolle, Bertrand, 1999. "Cash-in-Advance Constraints in the Diamond Overlapping Generations Model: Neutrality and Optimality of Monetary Policies," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 431-52, July.
- Crettez, B. & Michel, P. & Wigniolle, B., 1997. "Cash-in-Advance Constraints in the Diamond Overlapping Generations Model: Neutrality and Optimality of Monetary Policies," Papiers d'Economie MathÃ©matique et Applications 97.52, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Wang, P. & Yip, C.K., 1991.
"Examining the Long-Run Effect of Money on Economic Growth,"
6-91-2, Pennsylvania State - Department of Economics.
- 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.
- 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.
- 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.
- Docquier, Frederic & Paddison, Oliver & Pestieau, Pierre, 2007.
"Optimal accumulation in an endogenous growth setting with human capital,"
Journal of Economic Theory,
Elsevier, vol. 134(1), pages 361-378, May.
- Frederic, DOCQUIER & Oliver, Paddison & Pierre PESTIEAU, 2006. "Optimal accumulation in an endogenous growth setting with human capital," Discussion Papers (ECON - Département des Sciences Economiques) 2006022, Université catholique de Louvain, Département des Sciences Economiques.
- Docquier, Frédéric & Paddison, Oliver & Pestieau, Pierre, 2006. "Optimal Accumulation in an Endogenous Growth Setting with Human Capital," IZA Discussion Papers 2081, Institute for the Study of Labor (IZA).
- Gahvari, Firouz, 2007. "The Friedman rule: Old and new," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 581-589, March.
- 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.
- Gomme, Paul, 1993.
"Money and growth revisited : Measuring the costs of inflation in an endogenous growth model,"
Journal of Monetary Economics,
Elsevier, vol. 32(1), pages 51-77, August.
- Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
- 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.
- 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.
- 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.
- Michel, Philippe & Wigniolle, Bertrand, 2005.
"Cash-In-Advance Constraints, Bubbles, And Monetary Policy,"
Cambridge University Press, vol. 9(01), pages 28-56, February.
- 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.
- Beatrix Paal & Bruce D. Smith, 2001.
"The sub-optimality of the Friedman rule and the optimum quantity of money,"
IEHAS Discussion Papers
0113, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
- 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.
- 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.
- Peter Ireland, 2005.
"The liquidity trap, the real balance effect, and the Friedman rule,"
05-3, Federal Reserve Bank of Boston.
- Peter N. Ireland, 2005. "The Liquidity Trap, The Real Balance Effect, And The Friedman Rule ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1271-1301, November.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2708. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)
If references are entirely missing, you can add them using this form.