Optimal money growth in a limited participation model with heterogeneous agents

This paper studies optimal money growth in a cash-in-advance production economy with heterogeneity in patience levels and know-how. We show that the rate of deflation suggested by the Friedman rule is limited by the subjective discount rate of the most patient agent in the economy. The output distor...

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Bibliographic Details
Published in:Review of economic design 2005-04, Vol.9 (2), p.91-108
Main Authors: Başçí, Erdem, Saglam, Ismail
Format: Article
Language:English
Subjects:
Borrowing
Central banks
Consumption
Discount rates
Economic development
Equilibrium
Friction
Labor supply
Monetary policy
Preferences
Working capital
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Summary:This paper studies optimal money growth in a cash-in-advance production economy with heterogeneity in patience levels and know-how. We show that the rate of deflation suggested by the Friedman rule is limited by the subjective discount rate of the most patient agent in the economy. The output distortion due to cash-in-advance constraints on firms can completely be eliminated by means of the Friedman rule if and only if firms are run by the most patient agents.
ISSN:1434-4742
1434-4750
DOI:10.1007/s10058-005-0122-1