Diseconomies of Money and Optimal Inflation

This paper develops a growth model that is affected by the rate of inflation. The problem of matching savings to tangible capital investments indicates exposure to in-flation (in what is otherwise a fully-competitive intertemporal exchange equilibrium). Inflation acts as a tax on unmatched savings and, therefore, might be used as a pol-icy instrument that better aligns private incentives to search for productive matches. Simulations indicate that a small positive rate of inflation is the optimal stationary policy. Further, the optimal rate of inflation is negatively correlated with transitory productivity shocks. The model offers a unique illustration of monetary policy in a micro-consistent real general equilibrium. (JEL E00, E13