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Oxford Economic Papers Advance Access originally published online on December 10, 2004
Oxford Economic Papers 2005 57(1):34-50; doi:10.1093/oep/gpi007
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© Oxford University Press 2004; All rights reserved

Optimal monetary policy with heterogeneous agents: a case for inflation

Theodore Palivos

Department of Economics, University of Macedonia, 156 Egnatia Street, Thessalonica 540 06, Greece; e-mail: tpalivos{at}uom.gr

This paper analyses the role of monetary policy in an overlapping-generations monetary growth model with two types of agents, who exhibit a different degree of altruism towards their descendants. It is shown that changes in the money growth rate have significant distributional effects. Furthermore, the optimal rate of monetary expansion is, in general, higher than the one implied by the Friedman rule and may, in fact, yield a small but positive rate of inflation, even though capital is invariant to changes in the money growth rate. Finally, this optimal rate of monetary expansion takes higher values as the society's aversion towards inequality increases.

Key Words: JEL classification: O42 • E58


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