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.JEL Classifications: E31, E42, E63

This paper reexamines the condition $E\{\ln r\} > \ln $ (1 + n), which Zilcha (1991) presents as a necessary and sufficient condition for dynamic inefficiency of stationary allocations in overlapping generation models with stochastic production. We show that this condition is necessary but not sufficient for a stationary allocation to be dynamically inefficient by Zilcha’s definition. We also show that there is a narrow but widely studied class of specifications in which the Zilcha test is both necessary and sufficient for dynamic inefficiency of stationary competitive equilibrium allocations. Outside this class, however, counterexamples can be constructed relatively easily. Copyright Springer-Verlag Berlin/Heidelberg 2005Dynamic inefficiency, Zilcha criterion.,

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take the form of permanent changes in the growth rate of the base money stock that produce permanent changes in the rate of inflation. We follow the bulk of the inflation-cost literature by basing our cost estimates on comparisons of alternative steady states. We follow the recent trend in applied macroeconomic theory by calibrating our model to increase the empirical credibility of its predictions. The principal goal of our calibration procedure is to produce a steady-state equilibrium that matches certain longrun-average features of U.S. postwar data. We have given the model a variety of characteristics that increase both its overall plausibility and its ability to mimic these data. The characteristics include households that live for a large but finite number of periods, exogenous technological progress, exogenous population growth, costly financial intermediation, and endogenous labor-leisure decisions. The model also includes a fairly elaborate government sector, including real expenditures (government purchases), taxes on labor and capital income, seigniorage revenue, and government debt. The importance of the role played by the government sector is a distinctive feature of our analysis. A characteristic of the observed public finance system that plays a key role in driving our results is that capital income taxes are levied on net nominal income, so that increases in the inflation rate increase effective capital income tax rates. In this respect, our analysis is similar to recent work by Feldstein (1997) and Abel (1997). However, their estimates of the cost of inflation are based largely on the tendency of higher effective capital income tax rates to increase the wedge between the before-tax and