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Optimal Monetary Policy with Heterogeneous Agents: Is There a Case for Inflation?

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  • Theodore Palivos

    (Louisiana State University)

Abstract

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.

Suggested Citation

  • Theodore Palivos, 1999. "Optimal Monetary Policy with Heterogeneous Agents: Is There a Case for Inflation?," Computing in Economics and Finance 1999 353, Society for Computational Economics.
    • Handle: RePEc:sce:scecf9:353
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    Cited by:

    1. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2009. "Optimal monetary policy and economic growth," European Economic Review, Elsevier, vol. 53(2), pages 210-221, February.
    2. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "The Tobin effect and the Friedman rule," Staff Reports 224, Federal Reserve Bank of New York.
    3. Al-Jarhi, Mabid, 2000. "السياسات النقدية في إطار إسلامي [Monetary Policy in an Islamic Framework]," MPRA Paper 67547, University Library of Munich, Germany, revised 2002.

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