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The Friedman Rule in a Model with Endogenous Growth and Cash-in-Advance Constraint

Authors

  • FIROUZ GAHVARI


  • I am grateful to two anonymous referees for their helpful comments. I also thank the participants in the Conference in Honor of Pierre Pestieau, held at University of Liège and CORE, June 2009.

Firouz Gahvari is at the Department of Economics University of  Illinois at Urbana-Champaign  (E-mail: fgahvari@illinois.edu)

Abstract

This paper introduces money into an overlapping-generations model with endogenous growth. The main message of the paper is that as long as the modified golden rule is attained, the Friedman rule is optimal. The result holds regardless of the ability of the government to internalize the externality and control the level of human capital. Other results include: (i) violation of the Friedman rule for a different second-best environment wherein human capital accumulation is controlled but not physical capital accumulation and (ii) existence of a negative relationship between money growth rate and the economy’s endogenous growth rate.

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