Optimal Monetary Growth

20 Pages Posted: 15 Mar 2007 Last revised: 4 Nov 2022

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: 1987

Abstract

In the absence of monetary superneutrality, inflation affects capital accumulation and the demand for real balances. This paper derives the combination of monetary and lump-sum fiscal policy which maximizes the sum of discounted utilities of representative consumers in present and future generations. Under the optimal policy package, the steady state has a zero nominal interest rate and has monetary contraction at the rate of intergenerational discount. As the rate of intergenerational discount rate approaches zero, optimal policy maximizes steady state utility of the representative consumer. In this case, the optimal steady state is characterized by a constant nominal money supply.

Suggested Citation

Abel, Andrew B., Optimal Monetary Growth (1987). NBER Working Paper No. w2136, Available at SSRN: https://ssrn.com/abstract=971617

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