Macroeconomic Dynamics

Table of Contents - 2010 - Volume 14, Issue 05  

Vintage Article

ALTERNATIVE MONETARY POLICIES IN A TURNPIKE ECONOMY

Rodolfo Manuellia1 and Thomas J. Sargenta2 c1

a1 Washington University

a2 Hoover Institution, Stanford University and New York University

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;
  • Pareto Optimality;
  • Friedman Rule

Correspondence:

c1 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.

Footnotes

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.