The Optimal Inflation Rate in an Overlapping-Generations Economy with Land

Bennett T. McCallum

NBER Working Paper No. 1892 (Also Reprint No. r1013)
Issued in April 1986
NBER Program(s):   EFG   ME

This paper is concerned with the optimal inflation rate in an overlapping-generations economy in which (i) aggregate output is constrained by a standard neoclassical production function with diminishing marginal products for both capital and labor and (ii) the transaction-facilitating services of money are represented by means of a money-in-the-utility-function specification. With monetary injections provided by lump-sum transfers, the famous Chicago Rule prescription for monetary growth is necessary for Pareto optimality but a competitive equilibrium may fail to be Pareto optimal with that rule in force because of capital over accumulation. The latter possibility does not exist, however, if the economy includes an asset that is productive and non-reproducible--i.e., if the economy is one with land. As this conclusion is independent of the monetary aspects of the model, it is argued that the possibility of capital over accumulation should not be regarded as a matter of theoretical concern, even in the absence of government debt, intergenerational altruism, and social security systems or other "social contrivances."

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Document Object Identifier (DOI): 10.3386/w1892


  • Barnett, William and Kenneth J. Singleton (eds.) New Approaches to Monetary Economics: Proceedings of the Second International Symposium in Economic Theory and Econometrics. New York: Cambridge University Press, 1987.
  • "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land ." From New Approaches to Monetary Economics, edited by William A. Barnett and Kenneth J. Singleton, pp. 325-339, New York: Cambridge University Press, 1987.

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