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Optimal Monetary Policy in OLG Models with Long-Lived Agents: A Note

Authors


  • Ryoji Hiraguchi, Faculty of Economics, Ritsumeikan University, 1-1-1, Noji-Higashi, Kusatsu, Shiga, Japan (rhira@fc.ritsumei.ac.jp).

  • I thank two anonymous referees for their comments.

Abstract

This note reexamines Crettez, Michel, and Wigniolle (2002), who studied a two-period overlapping generations model with cash-in-advance constraints and showed that a combination of saving tax and monetary policy involving positive nominal interest rates could achieve the first-best allocation. The note shows that their result does not hold if agents live for three periods. The implementation of the first best requires the Friedman rule. If agents are long-lived, saving tax cannot offset a distortion caused by the positive nominal interest rate.

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