Alternative monetary policies in a turnpike economy

Rodolfo Manuelli, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    This paper modifies a Townsend turnpike model by letting agents stay at a location long enough to trade some consumption loans, but not long enough to support a Pareto-optimal allocation. Monetary equilibria exist that are nonoptimal in the absence of a scheme to pay interest on currency at a particular rate. Paying interest on currency at the optimal rate delivers a Pareto-optimal allocation, but a different one than the allocation for an associated nonmonetary centralized economy. The price level remains determinate under an optimal policy. We study the response of the model to "helicopter drops" of currency, steady increases in the money supply, and restrictions on private intermediation.

    Original languageEnglish (US)
    Pages (from-to)727-762
    Number of pages36
    JournalMacroeconomic Dynamics
    Volume14
    Issue number5
    DOIs
    StatePublished - Nov 2010

    Keywords

    • Credit
    • Fiat Money
    • Friedman Rule
    • Pareto Optimality

    ASJC Scopus subject areas

    • Economics and Econometrics

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