Monetary policy rules in an OLG model with non-superneutral money

Leopold von Thadden

Journal of Macroeconomics, 2012, vol. 34, issue 1, 147-166

Abstract: This paper considers an overlapping generations economy with capital accumulation and two outside assets (government bonds, fiat money) and compares the dynamic properties of two stylized monetary policy rules: (i) a constant money growth rule and (ii) an interest rate targeting rule which allows for an endogenous feedback to inflation. The results of this comparison depend strongly on whether under the overall monetary-fiscal regime long-run real interest rates are independent of inflation. If this is the case (i.e. superneutrality prevails) there exists in our model a unique and stable steady state under either monetary policy rule. By contrast, if superneutrality fails there is scope for much richer dynamics, characterized by multiple steady states and globally indeterminate dynamics. The paper offers a classification of such constellations and argues that under both monetary policy rules uniqueness and stability of steady states can be restored, provided the long-run inflation target and the feedback of the interest rate targeting rule are appropriately chosen.

Keywords: Monetary policy; Fiscal regimes; Overlapping generations (search for similar items in EconPapers)
JEL-codes: E52 E63 H62 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:34:y:2012:i:1:p:147-166

DOI: 10.1016/j.jmacro.2011.09.007

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