The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?

Joydeep Bhattacharya, Joseph Haslag and Steven Russell

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: In models of money with an infinitely-lived representative agent (ILRA models), the optimal monetary policy is almost always the Friedman rule. Overlapping generations (OG) models are different: in this paper, we study how they are different, and why. We investigate the welfare properties of monetary policy in a simple OG model under two different types of money demand specifications and under two alternative assumptions about the generational timing of taxes for money retirement. We find that the Friedman rule is generally not the policy that maximizes steady-state utility. We conclude that the key difference between ILRA and OG monetary models is that in the latter, the standard method for constructing a monetary regime causes transactions involving money to become intergenerational transfers. Overlapping generations are different in this regard; we study how they are different and why.

Keywords: Friedman rule; optimal monetary policy; overlapping generations model; money; intergenerational transfers (search for similar items in EconPapers)
JEL-codes: E31 E42 E63 (search for similar items in EconPapers)
Date: 2004-04-01
New Economics Papers: this item is included in nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Monetary Economics, November 2005, vol. 52 no. 8, pp. 1401-1433

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Related works:
Journal Article: The role of money in two alternative models: When is the Friedman rule optimal, and why? (2005)
Working Paper: The role of money in two alternative models: When is the Friedman rule optimal, and why? (2005)
Working Paper: The role of money in two alternative models: When is the Friedman rule optimal, and why? (2004)
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