Optimal monetary policy and economic growth

Abstract

This paper studies a overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money. We assume a production function with a knowledge-externality (Romer-style) that nests economies with endogenous growth (AK form) and those with no long run growth (the Diamond model). We show that the Tobin effect is always operative. Under CRRA preferences, irrespective of the degree of risk aversion, we also show that for some positive inflation to be optimal and for the Friedman rule to be sub-optimal, it is sufficient (but not necessary) that there be a mild degree of social increasing returns Under CRRA preferences, irrespective of the degree of risk aversion, we also show that for some positive in ‡ation to be optimal and for the Friedman rule to be sub-optimal, it is su¢ cient (but not necessary) that there be a mild degree of social increasing returns.

Money and Pay-As-You-Go Pension

“…Zero inflation policy is examined by Bhattacharya et al (2009), who derive that zero inflation policy is not optimal because it does not maximize social welfare. This paper presents derivation that if the pension policy exists, the optimal growth rate of money supply increases for any inflation rate including zero inflation: even if the zero inflation policy should be adopted to maximize social welfare because of pension policy, the zero inflation policy is an inappropriate policy.…”

“…These two effects on the inflation rate and the income growth rate differ. Bhattacharya et al (2009) derive that the zero inflation policy is not optimal. However, the analyses presented here derive the optimal level of the growth rate of money supply can be changed by a pay-as-you-go pension policy, which is not expressed in the related literature.…”

“…Heer and Maußner (2012) refer to the effects on income inequality. De Gregorio (1993) and Bhattacharya et al (2009) derive an optimal monetary policy.…”

“…An increase in reduces the income growth rate 1 + g. See the Appendix A for a detailed proof.13 Bhattacharya et al (2009) examines the case of the Friedman rule that the real interest rate is equal to the inverse of the inflation rate.…”

Fiscal rules in a monetary economy: Implications for growth and welfare

“…To address these issues, this study extends the model of Schreft and Smith () by assuming Barro ()‐type public production services as an engine of economic growth. This assumption leads to AK technology as in Espinosa‐Vega and Yip (), Hung (), and Bhattacharya, Haslag, and Martin (). In addition, we assume two fiscal rules that are widely used in industrial and developing countries: a debt rule, which keeps the debt‐to‐gross domestic product (GDP) ratio at a constant rate, and an expenditure rule, which keeps the expenditure‐to‐GDP ratio constant (Budina, Kinda, Schaechter, & Weber, ).…”