Optimal Monetary Policy and Economic Growth

Joydeep Bhattacharya (), Joseph Haslag () and Antoine Martin ()

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: 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

Keywords: Friedman rule; Tobin effect; monetary policy (search for similar items in EconPapers)
JEL-codes: E4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2005-09-15
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Forthcoming in European Economic Review

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http://dx.doi.org/10.1016/j.euroecorev.2008.03.003

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Journal Article: Optimal monetary policy and economic growth (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12413

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