The role of money in two alternative models: When is the Friedman rule optimal, and why?

Bhattacharya, Joydeep; Haslag, Joseph H.; Russell, Steven

doi:10.1016/j.jmoneco.2004.08.007

Cited by 45 publications

(55 citation statements)

References 28 publications

(67 reference statements)

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“…Weiss (1980), Freeman (1985Freeman ( , 1989Freeman ( , 1993, and Smith (2002) all present examples of overlapping-generations models in which the Friedman rule fails to maximize private agents' steady-state utility. Bhattacharya, Haslag, and Russell (2004) unify and explain these results by tracing them back to distributional effects that are absent in representative-agent models like Krugman's and Svensson's. This paper also shows that distributional effects-the same distributional effects, as a matter of fact, that give rise to the real balance effect-operate once population growth is introduced into Krugman's cash-in-advance model.…”

Section: Old Ideas New Modelsmentioning

confidence: 80%

“…Smith (2002) all present examples of overlapping-generations models in which the Friedman rule fails to maximize steady-state utility; Bhattacharya, Haslag, and Russell (2004) unify these examples by arguing that, in each case, monetary contraction has distributional effects of exactly the same kind as occur in the model with infinitely lived agents studied here.…”

Section: The Welfare Costs Of Deflationmentioning

confidence: 81%

“…On the other hand, Bhattacharya, Haslag, and Russell (2004) also demonstrate that in overlapping-generations models, the Friedman rule's optimality is typically restored when offsetting fiscal transfers are used to neutralize the distributional effects that deflationary policies would otherwise have. 1 This result, too, carries over to the model studied here with growth in the number of infinitely lived households.…”

Section: Old Ideas New Modelsmentioning

confidence: 90%

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The Liquidity Trap, the Real Balance Effect, and the Friedman Rule

Ireland

2005

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates, using a model with population growth that nests, as a special case, a more conventional specification in which there is a single infinitely lived representative agent. The paper shows that with a growing population, monetary policy has distributional effects that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive. Terms of use: Documents in EconStor may JEL Classifications: E31, E52Peter N. all of the taxes that will eventually be used to retire the government's debt. Less widely appreciated, however, is a closely related finding, presented most explicitly by Weil (1991), but also implicit in earlier work by Sachs (1983) and Cohen (1985). These authors show that government-issued fiat money will not be perceived as a source of private-sector wealth if the households owning that money are the same households that, first, receive all of the transfers or pay all of the taxes associated with future changes in the money supply and that, second, incur all of the opportunity costs associated with carrying the money stock across all future periods. In fact, Krugman's and Svensson's representative-agent models describe environments in which money is not net wealth. In these models, therefore, the real balance effect disappears. Weiss (1980( ), Freeman (1985( , 1989( , 1993, and Smith (2002) Weil's model, in which goods are received by each household in the form of a constant endowment, is also extended here by allowing each household to produce output with labor.Here, as in Wilson (1979), Cooley and Hansen (1989), Cole and Kocherlakota (1998), andIreland (2003), positive nominal interest rates distort households' labor supply decisions.Thus, the structure of production and trade gives rise to a mechanism that might make the central bank want to follow the Friedman (1969) rule, which provides for zero nominal interest rates. And, indeed, the Friedman rule is optimal in the special case where the population growth rate equals zero. When the population grows at a positive rate, however, the taxes that the government must levy to implement the Friedman rule generate distributional effects that can make zero nominal interest rates quite costly for...

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Section: Old Ideas New Modelsmentioning

confidence: 80%

Section: The Welfare Costs Of Deflationmentioning

confidence: 81%

Section: Old Ideas New Modelsmentioning

confidence: 90%

See 1 more Smart Citation

The Liquidity Trap, the Real Balance Effect, and the Friedman Rule

Ireland

2005

SSRN Journal

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“…By de…nition, such economies are dynamically e¢ cient. Bhattacharya, Haslag, and Russell (2005) and others have demonstrated that linear storage random relocation economies, irrespective of the degree of risk aversion, always return a verdict in favor of zero in ‡ation. Here, in contrast we are able to show, for example, that for logarithmic utility, zero in ‡ation is never optimal if the economy is dynamically e¢ cient.…”

Section: Model)mentioning

confidence: 99%

Optimal monetary policy and economic growth

Bhattacharya

Haslag

Martin

2009

European Economic Review

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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.

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“…Weiss (1980) and Drazen (1981) studied superneutrality in an overlapping generations model without operative bequests and showed that inflation indeed stimulates capital formation, thus reaffirming the Tobin effect. In perhaps the most advanced treatment of the issue, Abel (1987) and Gahvari (1988Gahvari ( , 2007 noted a subtle issue with the preceding studies: Money creation redistributes income among generations; see also Crettez et al (1999), Bhattacharya et al (2005) and Ireland (2005). While policy changes are not superneutral per se, the government might make them effectively superneutral by using suitable lump-sum taxes and transfers.…”

Section: Introductionmentioning

confidence: 99%