Bhattacharya, Joydeep; Haslag, Joseph; Martin, Antoine

European Economic Review Vol. 53 no. 2 (2009): 210-221. (Originally published as WP #05025, January 2009)

This paper studies a overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money. We assume a production function with a knowledge-externality (Romer-style) that nests economies with endogenous growth (AK form) and those with no long run growth (the Diamond model). We show that the Tobin effect is always operative. Under CRRA preferences, irrespective of the degree of risk aversion, we also show that for some positive inflation to be optimal and for the Friedman rule to be sub-optimal, it is sufficient (but not necessary) that there be a mild degree of social increasing returns

JEL Classification: E31, E51, E58

Keywords: Friedman rule, Tobin effect, monetary policy

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