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Optimal money growth in a limited participation model with heterogeneous agents

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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.

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Authors and Affiliations

  1. The Central Bank of Republic of Turkey, 06100, Ankara, Turkey

    Erdem Başçí

  2. Department of Economics, Bogaziçi University, 34342, Bebek, Istanbul, Turkey

    Ismail Saglam

  3. Department of Economics, Bilkent University, 06800, Bilkent, Ankara, Turkey

    Ismail Saglam

Authors
  1. Erdem Başçí
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  2. Ismail Saglam
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Corresponding author

Correspondence to Erdem Başçí.

Additional information

Received: 16 August 2003, Accepted: 22 March 2005,

JEL Classification:

D52, D90, E21, E41, E52

Parts of this paper were completed while the first and second authors were visiting the University of York and Princeton University respectively. We are thankful for the hospitality of these institutions. The second author also acknowledges the hospitality and support of Bilkent University that he is currently visiting, the support from the Turkish Academy of Sciences in the framework of the ‘Distinguished Young Scientist Award Program’ (TUBA-GEBIP/2004), the grant awarded by the Scientific and Technical Research Council of Turkey (TUBITAK) under the NATO Science Fellowship Program as well as the support from the Center for Economic Design of Bogaziçi University. This paper was presented in the ERC/METU Second International Conference on Economics, Ankara, September 1998, and at seminars in Bilkent, Bogaziçi and Ohio State Universities. We thank, in particular, Emre Alper, Sumru Altug, Huw Dixon, Tatsuro Ichiishi, Ivan Pastine, Murat Sertel and Alan Sutherland for useful comments. We also thank two anonymous referees for comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect that of the Central Bank of Republic of Turkey.

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Başçí, E., Saglam, I. Optimal money growth in a limited participation model with heterogeneous agents. Rev. Econ. Design 9, 91–108 (2005). https://doi.org/10.1007/s10058-005-0122-1

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  • DOI: https://doi.org/10.1007/s10058-005-0122-1

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