Optimal Monetary Policy with Heterogeneous Agents: Is There a Case for Inflation?
No 353, Computing in Economics and Finance 1999 from Society for Computational Economics
This paper analyzes the role of monetary policy in an overlapping generations model with two assets, capital and money, and two types of agents who exhibit different degrees of altruism towards their descendants. It is shown that changes in the money growth rate have significant distributional effects. Furthermore, the optimal rate of monetary expansion is, in general, higher than the one implied by the Friedman rule and may, in fact, yield a small but positive rate of inflation. Finally, this optimal rate of monetary expansion takes higher values as the society's aversion towards inequality increases.
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