The Optimal Rate of Money Creation in an Overlapping Generations Model

This paper develops a large scale overlapping generations model and calibrates it for the U.S. economy. Simulations with the model show that the steady state welfare maximizing inflation rate may be positive, although the numerical results are not robust. It is also shown, however, that increases in the inflation rate are never Pareto efficient because during the transition to the new steady state at least some generations are made worse-off. Using an optimality criterion that takes into account the welfare of all generations, it is found that implementing Friedman’s rule is a Pareto superior policy, and that the efficiency gains derived from implementing such rule could be substantial.Monetary expansion;Economic models;inflation, inflation rate, money demand, monetary economics, money balances, inflation rates, money demands, price level, monetary balances, monetary aggregate, nominal interest rate, money supply, rate of inflation, real interest rate, real value, value of money, percent inflation, costs of inflation, percent inflation rate, demand for money, money base, monetary policy, increase in inflation, relative prices, monetary regimes, real money, money stock, monetary growth, real variables, monetary fund, money growth, inflation tax, range of inflation, social discount rate, monetary base, annual inflation rate, discount rate, annual inflation, aggregate demand, real rate of interest, low inflation, relative price, money market, money transfers, lower inflation, effects of inflation, money markets, monetary authority, monetary policy rule, monetary regime, aggregate demands