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Liquidity, the Mundell-Tobin Effect, and the Friedman Rule

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  • Lukas Altermatt
  • Christian Wipf

Abstract

We investigate how the Mundell-Tobin effect, i.e., a positive relation between in flation and capital investment, changes the optimal monetary policy prescription in a framework that combines overlapping generations and new monetarist models. We find that the Friedman rule is optimal if and only if there is no Mundell-Tobin effect. A Mundell-Tobin effect is more likely to occur at the Friedman rule if capital is relatively liquid, and if the agents' risk aversion is relatively low. If the Friedman rule is not optimal, the optimal money growth rate lies between the Friedman rule and a constant money stock. We also show that it is more efficient to implement de flationary monetary policies by raising lump-sum taxes on old agents only.

Suggested Citation

  • Lukas Altermatt & Christian Wipf, 2020. "Liquidity, the Mundell-Tobin Effect, and the Friedman Rule," Diskussionsschriften dp2013, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp2013
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    1. Pedro Gomis‐Porqueras & Christopher Waller, 2022. "Optimal Taxes under Private Information: The Role of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(7), pages 1941-1969, October.

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    More about this item

    Keywords

    New monetarism; overlapping generations; optimal monetary policy;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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