Optimal money growth in a limited participation model with heterogeneous agents
Review of Economic Design, vol.9, no.2, pp.91-108, 2005 (Scopus)
- Publication Type: Article / Article
- Volume: 9 Issue: 2
- Publication Date: 2005
- Doi Number: 10.1007/s10058-005-0122-1
- Journal Name: Review of Economic Design
- Journal Indexes: Scopus
- Page Numbers: pp.91-108
- Keywords: Cash-in-advance, Friedman rule, Inflation, Limited participation
- Open Archive Collection: AVESIS Open Access Collection
- TED University Affiliated: No
Abstract
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. © Springer-Verlag 2005.