Optimal Monetary Policy and Economic Growth - FEDERAL RESERVE BANK of NEW YORK

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Optimal Monetary Policy and Economic Growth

Previous title: “The Tobin Effect and the Friedman Rule”

October 2005 Number 224

Revised August 2006

JEL classification: E31, E51, E58

Authors: Joydeep Bhattacharya, Joseph Haslag, and AntoineMartin

This paper studies an 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 (constant relative risk aversion) preferences, a mild degree of social increasing returns is sufficient (but not necessary) for some positive inflation to dominate zero inflation and for the Friedman rule to be suboptimal, irrespective of the degree of risk aversion.

Available only in PDF PDF

26 pages / 222 kb

For a published version of this report, see Joydeep Bhattacharya, Joseph Haslag, and Antoine Martin, "Optimal Monetary Policy and Economic Growth," European Economic Review 53, no. 2 (February 2009): 210-21.

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