Growth in Monetary Economies: Steady-State Analysis of Monetary Policy

Alfonso Novales, Esther Fernández and Jesus Ruiz

Chapter 8 in Economic Growth, 2022, pp 411-460 from Springer

Abstract: Abstract In this chapter we characterize optimal growth in a monetary economy, using the steady-state optimality conditions to analyze alternative designs for monetary policy. We introduce the concept of optimal steady-state rate of inflation and characterize conditions under which Friedman’s prescription for a zero nominal interest rate can be optimal. Steady-state optimality conditions are used to characterize the feasible combinations of monetary and fiscal policies. A numerical exercise is used to evaluate the welfare implications of alternative monetary policies. In another exercise, the reader will see the existence of a Laffer curve in this economy. The chapter closes with a characterization of optimal monetary policy in a dynamic Ramsey model, which takes into consideration the short- as well as the long-run effects of a policy intervention.

Keywords: Money in the utility function; Monetary policy; Real interest rate; Representative agent; Nominal interest rate; Optimal inflation tax; Welfare Inflation costs; Monetary and Fiscal policy coordination (search for similar items in EconPapers)
Date: 2022
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Related works:
Chapter: Growth in Monetary Economies: Steady-State Analysis of Monetary Policy (2014)
Chapter: Growth in Monetary Economies: Steady-State Analysis of Monetary Policy (2009)
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DOI: 10.1007/978-3-662-63982-5_8

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