Optimal Monetary Growth

Andrew B. Abel

NBER Working Paper No. 2136 (Also Reprint No. r0922)
Issued in October 1987
NBER Program(s):   EFG

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.

(420 K)

(241 K)

Published: Abel, Andrew B. "Optimal Monetary Growth," Journal of Monetary Economics, Vol. 19, No. 3, May 1987, pp 437-450.

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