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Optimal Monetary Policy in OLG Models with Long-Lived Agents: A Note

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  • RYOJI HIRAGUCHI

Abstract

This note reexamines Crettez, Michel, and Wigniolle ([CRETTEZ, P., 2002]), who studied a two-period overlapping generations model with cash-in-advance constraints and showed that a combination of saving tax and monetary policy involving positive nominal interest rates could achieve the first-best allocation. The note shows that their result does not hold if agents live for three periods. The implementation of the first best requires the Friedman rule. If agents are long-lived, saving tax cannot offset a distortion caused by the positive nominal interest rate.

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  • Ryoji Hiraguchi, 2014. "Optimal Monetary Policy in OLG Models with Long-Lived Agents: A Note," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 164-172, February.
    • Handle: RePEc:bla:jpbect:v:16:y:2014:i:1:p:164-172
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    References listed on IDEAS

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    1. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
    2. Peter Ireland, 2003. "Implementing the Friedman Rule," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 120-134, January.
    3. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal monetary policy and economic growth," European Economic Review, Elsevier, vol. 53(2), pages 210-221, February.
    4. Bertrand Crettez & Philippe Michel & Bertrand Wigniolle, 2002. "Optimal Monetary Policy, Taxes, and Public Debt in an Intertemporal Equilibrium," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 299-316, July.
    5. Gahvari, Firouz, 2007. "The Friedman rule: Old and new," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 581-589, March.
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    Cited by:

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    2. Fedotenkov, Igor, 2015. "Population ageing and prices in an OLG model with money created by credits," MPRA Paper 66056, University Library of Munich, Germany.
    3. Fedotenkov, Igor, 2018. "Population ageing and inflation with endogenous money creation," Research in Economics, Elsevier, vol. 72(3), pages 392-403.

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