Incentives and the Limits to Deflationary Policy

David Andolfatto ()

MPRA Paper from University Library of Munich, Germany

Abstract: I study a version of the Lagos-Wright (2005) model for which the Friedman rule is always a desirable policy, but where implementation may be constrained by the need to respect incentive-feasibility. In the environment I consider, incentives are distorted owing to private information and limited commitment. I demonstrate that a monetary economy can overcome the former friction, but not necessarily the latter. When this is so, there is an incentive-induced lower bound to the rate of deflation away from the Friedman rule. There are also circumstances in which the best incentive-feasible monetary policy may entail a strictly positive rate of inflation. This will be the case, for example, if agents are sufficiently impatient or if there are rapidly diminishing returns to production.

Keywords: Money; Memory; Incentives; Friedman Rule (search for similar items in EconPapers)
JEL-codes: E50 E0 (search for similar items in EconPapers)
Date: 2007-09-01, Revised 2007-09-02
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http://mpra.ub.uni-muenchen.de/4681/ orginal version
http://mpra.ub.uni-muenchen.de/4688/ revised version

Related works:
Working Paper: Incentives and the Limits to Deflationary Policy (2007)
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