An overlapping generations model for monetary policy analysis
Samuel Huber, Jaehong Kim
European Economic Review 125, 103429
#002570 20200627 (published) Views:1408
We integrate an overlapping generations structure into the standard Lagos and Wright (2005) framework and show that mild inflation can be welfare-improving. The reason behind this result is that inflation induces young agents to reduce their savings and to increase their consumption, which overpowers the utility loss of old agents. However, the beneficial effect disappears for higher inflation rates, such that the optimal inflation rate is one at an intermediate level.
JEL-Codes: D90; E31; E41; E50
Keywords: Overlapping generations; Monetary theory; Friedman rule