Uncertainty-Induced Dynamic Inefficiency and the Optimal Inflation Rate

Kuk Mo Jung

MPRA Paper from University Library of Munich, Germany

Abstract: I construct an overlapping-generations model of money with Epstein and Zin (1989) preferences and study how aggregate output uncertainty affects the optimal rate of inflation. When money only serves as savings instruments, I find that the optimality of Friedman Rule breaks up only if agents prefer late resolution of uncertainty. However, if an additional role of money as a medium of exchange is introduced, then the Friedman Rule becomes generally suboptimal regardless of agents' preferences for the timing of uncertainty resolution. The aggregate output uncertainty, nevertheless, crucially determines the level of optimal inflation rate in this case.

Keywords: money; overlapping generations; recursive preferences; optimal inflation (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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https://mpra.ub.uni-muenchen.de/70663/9/MPRA_paper_70663.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/71579/1/MPRA_paper_71579.pdf revised version (application/pdf)
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Related works:
Journal Article: Uncertainty-induced dynamic inefficiency and the optimal inflation rate (2018)
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