The Optimal Rate of Money Creation in an Overlapping Generations Model: Numerical Simulations for the U.S. Economy

A. Javier Hamann ()

No 1992/037, IMF Working Papers from International Monetary Fund

Abstract: This paper develops a large scale overlapping generations model and calibrates it for the U.S. economy. Simulations with the model show that the steady state welfare maximizing inflation rate may be positive, although the numerical results are not robust. It is also shown, however, that increases in the inflation rate are never Pareto efficient because during the transition to the new steady state at least some generations are made worse-off. Using an optimality criterion that takes into account the welfare of all generations, it is found that implementing Friedman’s rule is a Pareto superior policy, and that the efficiency gains derived from implementing such rule could be substantial.

Keywords: WP; inflation rate; capital stock; real value; substitution effect; money creation; rate of inflation; money balance; aggregate money demand; steady state; money demand function; price level; money holding; age consumption profile; Pareto efficiency; Inflation; Consumption; Currency issuance; Demand for money; Stocks; rate of money creation; numerical simulation; optimal rate of money creation (search for similar items in EconPapers)
Pages: 52
Date: 1992-05-01
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Citations: View citations in EconPapers (3)

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