IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/224.html
   My bibliography  Save this paper

The Tobin effect and the Friedman rule

Author

Listed:
  • Joydeep Bhattacharya
  • Joseph H. Haslag
  • Antoine Martin

Abstract

This paper addresses whether the Friedman rule can be optimal in an economy in which the Tobin effect is operative. We present an overlapping generations economy with capital in which limited communication and stochastic relocation create an endogenous transaction role for fiat money. We assume a production function with a knowledge externality (Romer-style) that nests economies with endogenous growth (AK form) and those with no long-run growth (the Diamond model). With logarithmic utility, the "anti-Tobin effect" is operative, and the Friedman rule is optimal (that is, stationary-welfare-maximizing) regardless of whether or not there is long-run growth. Under the more general CRRA (constant relative risk aversion) form of preferences, we show that an operative anti-Tobin effect is a sufficient condition for the Friedman rule to be optimal. Also, contrary to models with linear storage technologies, our model shows that zero inflation is not optimal.

Suggested Citation

  • Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "The Tobin effect and the Friedman rule," Staff Reports 224, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:224
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr224.html
    Download Restriction: no

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr224.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
    3. 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.
    4. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, 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(2), pages 437-454, May.
    5. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-576, April.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    7. Joe Haslag & Joydeep Bhattacharya & Steven Russell, 2003. "Understanding the Roles of Money, or When is the Friedman Rule Optimal, and Why?," Working Papers 0301, Department of Economics, University of Missouri.
    8. Stacey L. Schreft & Bruce D. Smith, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 519-550.
    9. Theodore Palivos, 1999. "Optimal Monetary Policy with Heterogeneous Agents: Is There a Case for Inflation?," Computing in Economics and Finance 1999 353, Society for Computational Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation (Finance) ; Money supply ; Monetary policy ; Friedman; Milton;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:224. 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: (Amy Farber). General contact details of provider: http://edirc.repec.org/data/frbnyus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.