Munich Personal RePEc Archive

Uncertainty-Induced Dynamic Inefficiency and the Optimal Inflation Rate

Jung, Kuk Mo (2016): Uncertainty-Induced Dynamic Inefficiency and the Optimal Inflation Rate.

This is the latest version of this item.

[img]
Preview
PDF
MPRA_paper_69715.pdf

Download (469kB) | Preview

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. 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 becomes generally suboptimal 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.

Available Versions of this Item

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.