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ALTERNATIVE MONETARY POLICIES IN A TURNPIKE ECONOMY

Published online by Cambridge University Press:  04 November 2010

Rodolfo Manuelli  and
Thomas J. Sargent
Rodolfo Manuelli
Affiliation:
Washington University
Thomas J. Sargent*
Affiliation:
Hoover Institution, Stanford University and New York University
*
Address correspondence to: Thomas J. Sargent, Department of Economics, New York University, 19 W. 4th St., 6FL, New York, NY 10012, USA; e-mail: [email protected].
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Abstract

This paper modifies a Townsend turnpike model by letting agents stay at a location long enough to trade some consumption loans, but not long enough to support a Pareto-optimal allocation. Monetary equilibria exist that are nonoptimal in the absence of a scheme to pay interest on currency at a particular rate. Paying interest on currency at the optimal rate delivers a Pareto-optimal allocation, but a different one than the allocation for an associated nonmonetary centralized economy. The price level remains determinate under an optimal policy. We study the response of the model to “helicopter drops” of currency, steady increases in the money supply, and restrictions on private intermediation.

Keywords

CreditFiat MoneyPareto OptimalityFriedman Rule
Type
Vintage Article
Information
Macroeconomic Dynamics , Volume 14 , Issue 5 , November 2010 , pp. 727 - 762
Copyright
Copyright © Cambridge University Press 2010

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