Liquidity, the Mundell–Tobin Effect, and the Friedman Rule

Lukas Altermatt and Christian Wipf

Journal of Money, Credit and Banking, 2024, vol. 56, issue 5, 1235-1259

Abstract: We investigate how a positive relation between inflation and capital investment (the Mundell–Tobin effect, MT‐E) affects optimal monetary policy in a framework that combines overlapping generations and new Monetarist models. We find that inflation rates above the Friedman rule are optimal if and only if there is an MT‐E. In the absence of the MT‐E, the Friedman rule is optimal. With an MT‐E, increasing inflation above the Friedman rule leads to a first‐order welfare gain from increasing capital investment, and only to a second‐order welfare loss from reducing consumption in markets where liquidity matters.

Date: 2024
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https://doi.org/10.1111/jmcb.12994

Related works:
Working Paper: Liquidity, the Mundell-Tobin Effect, and the Friedman Rule (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:56:y:2024:i:5:p:1235-1259

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