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Uncertainty-induced dynamic inefficiency and the optimal inflation rate

Title
Uncertainty-induced dynamic inefficiency and the optimal inflation rate
Author
정국모
Keywords
Money; Overlapping generations; Recursive preferences; Optimal inflation
Issue Date
2018-06
Publisher
ELSEVIER SCIENCE BV
Citation
INTERNATIONAL REVIEW OF ECONOMICS & FINANCE, v. 56, page. 486-506
Abstract
I construct an overlapping-generations model of money with Epstein and Zin (1989) preferences and study how aggregate output uncertainty affects the optimal rate of inflation for aggregate consumption. When money only serves as savings instruments, I find that the optimality of Friedman rule breaks up only if agents prefer late resolution of uncertainty. However, if an additional role of money as a medium of exchange is introduced, then the Friedman rule achieves generally suboptimal level of aggregate consumption regardless of agents' preferences for the timing of uncertainty resolution. The aggregate output uncertainty, nevertheless, crucially determines the level of optimal inflation rate in this case. Lastly, the optimal degree of aggregate output uncertainty given a positive inflation rate turns out to be generally non-zero regardless of the role of money.
URI
https://www.sciencedirect.com/science/article/pii/S1059056017307815?via%3Dihubhttps://repository.hanyang.ac.kr/handle/20.500.11754/119241
ISSN
1059-0560; 1873-8036
DOI
10.1016/j.iref.2017.12.006
Appears in Collections:
COLLEGE OF INTERNATIONAL STUDIES[S](국제학부) > INTERNATIONAL STUDIES(국제학부) > Articles
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