Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/60584 
Year of Publication: 
2005
Series/Report no.: 
Staff Report No. 224
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
This paper studies an 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 (constant relative risk aversion) preferences, a mild degree of social increasing returns is sufficient (but not necessary) for some positive inflation to dominate zero inflation and for the Friedman rule to be suboptimal, irrespective of the degree of risk aversion.
Subjects: 
Friedman rule, Tobin effect, monetary policy
JEL: 
E31
E51
E58
Document Type: 
Working Paper

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