Optimal Inflation Policy

Lawrence Summers

No 354, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper considers the problem of optimal long run monetary policy. It shows that optimal inflation policy involves trading off two quite different considerations. First, increases in the rate of inflation tax the holding of many balances, leading to a deadweight loss as excessive resources are devoted to economizing on cash balances. Second, increases in the rate of inflation raise capital intensity. As long as the economy has a capital stock short of the golden rule level, increases in capita intensity raise the level of consumption. Ignoring the second consideration leads to the common recommendation that the money growth rate be set so that the nominal interest rate is zero. Taking it into account can lead to significant modifications in the "full liquidity rule." Inter-actions of inflation policy with financial intermediation and taxation are also considered. The results taken together suggest that inflation can have important welfare effects, and that optimal inflation policy is an empirical question, which depends on the structure of the economy.

Date: 1979-05
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Summers, Lawrence H. "Optimal Inflation Policy." Journal of Monetary Economics, Vol. 7, No. 2, (March 1981), pp. 175-194.

Downloads: (external link)
http://www.nber.org/papers/w0354.pdf (application/pdf)

Related works:
Journal Article: Optimal inflation policy (1981)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:0354

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0354

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().