Alternative monetary policies in a turnpike economy

Rodolfo Manuelli; Thomas J. Sargent

doi:10.1017/S1365100509990940

Alternative monetary policies in a turnpike economy

Rodolfo Manuelli, Thomas J. Sargent

Research output: Contribution to journal › Article › peer-review

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 language	English (US)
Pages (from-to)	727-762
Number of pages	36
Journal	Macroeconomic Dynamics
Volume	14
Issue number	5
DOIs	https://doi.org/10.1017/S1365100509990940
State	Published - Nov 2010

Keywords

Credit
Fiat Money
Friedman Rule
Pareto Optimality

ASJC Scopus subject areas

Economics and Econometrics

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10.1017/S1365100509990940

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title = "Alternative monetary policies in a turnpike economy",

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.",

keywords = "Credit, Fiat Money, Friedman Rule, Pareto Optimality",

author = "Rodolfo Manuelli and Sargent, {Thomas J.}",

note = "Funding Information: This paper is based on an earlier paper by the authors entitled “Longer Trading Periods in the Townsend Turnpike Model.” We received very helpful comments on the earlier paper from an anonymous referee, David Romer, and Robert Townsend, for which we thank them. The work of both authors was supported by grants from the National Science Foundation. Address correspondence to: Thomas J. Sargent, Department of Economics, New York University, 19 W. 4th St., 6FL, New York, NY 10012, USA; e-mail: ts43@nyu.edu.",

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AU - Sargent, Thomas J.

N1 - Funding Information: This paper is based on an earlier paper by the authors entitled “Longer Trading Periods in the Townsend Turnpike Model.” We received very helpful comments on the earlier paper from an anonymous referee, David Romer, and Robert Townsend, for which we thank them. The work of both authors was supported by grants from the National Science Foundation. Address correspondence to: Thomas J. Sargent, Department of Economics, New York University, 19 W. 4th St., 6FL, New York, NY 10012, USA; e-mail: ts43@nyu.edu.

PY - 2010/11

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N2 - 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.

AB - 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.

KW - Credit

KW - Fiat Money

KW - Friedman Rule

KW - Pareto Optimality

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Alternative monetary policies in a turnpike economy

Abstract

Keywords

ASJC Scopus subject areas

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