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Optimal Monetary Policy and Economic Growth

  • Bhattacharya, Joydeep
  • Haslag, Joseph
  • Martin, Antoine

This paper studies a overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions 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). We show that the Tobin effect is always operative. Under CRRA preferences, irrespective of the degree of risk aversion, we also show that for some positive inflation to be optimal and for the Friedman rule to be sub-optimal, it is sufficient (but not necessary) that there be a mild degree of social increasing returns

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p1759-2005-09-01.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12413.

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Date of creation: 01 Jan 2009
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Publication status: Published in European Economic Review 2009, vol. 53 no. 2, pp. 210-221
Handle: RePEc:isu:genres:12413
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine.
  2. 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.
  3. Walsh, Carl E, 2003. " Accountability, Transparency, and Inflation Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 829-49, October.
  4. Schreft, Stacey L & Smith, Bruce D, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 519-50, July.
  5. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2004. "Heterogeneity, redistribution, and the Friedman rule," Research Working Paper RWP 04-01, Federal Reserve Bank of Kansas City.
  6. 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.
  7. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  8. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  9. Maxim Nikitin & Steven Russell, 2006. "Monetary policy arithmetic: reconciling theory with evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 39(1), pages 348-374, February.
  10. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2005. "Sub-Optimality of the Friedman Rule in Townsend's Turnpike and Stochastic Relocation Models of Money: Do Finite Lives and Initial Dates Matter?," Staff General Research Papers 12265, Iowa State University, Department of Economics.
  11. Antinolfi, Gaetano & Huybens, Elisabeth & Keister, Todd, 2001. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 187-219, July.
  12. 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.
  13. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  14. 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.
  15. 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.
  16. McCallum, Bennett T., 1990. "Inflation: Theory and evidence," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 18, pages 963-1012 Elsevier.
  17. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  18. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  19. R. Todd Smith, 1998. "The Friedman Rule and Optimal Monetary Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 295-302, May.
  20. Dutta, Jayasri & Kapur, Sandeep, 1998. "Liquidity Preference and Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 551-72, July.
  21. 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.
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