Working Paper: NBER ID: w2136
Authors: Andrew B. Abel
Abstract: In the absence of monetary superneutrality, inflation affects capital accumulation and the demand for real balances. This paper derives the combination of monetary and lump-sum fiscal policy which maximizes the sum of discounted utilities of representative consumers in present and future generations. Under the optimal policy package, the steady state has a zero nominal interest rate and has monetary contraction at the rate of intergenerational discount. As the rate of intergenerational discount rate approaches zero, optimal policy maximizes steady state utility of the representative consumer. In this case, the optimal steady state is characterized by a constant nominal money supply.
Keywords: monetary policy; fiscal policy; capital accumulation; utility maximization
JEL Codes: E52; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation (E31) | capital accumulation (E22) |
| inflation (E31) | demand for real balances (E41) |
| optimal monetary policy (E63) | steady-state utility (D11) |
| intergenerational discount rate approaches zero (D15) | optimal policy maximizes steady-state utility (C61) |
| optimal monetary policy (E63) | zero nominal interest rate (E43) |
| optimal net rate of nominal monetary growth positive (O42) | optimal monetary policy (E63) |
| inflation influences utility derived from real balances (E31) | consumer behavior and savings decisions (D12) |