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

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.     

PRODUCTIVE GOVERNMENT SPENDING,PATTERNS OF SPECIALIZATION AND ECONOMIC GROWTH IN A SMALL OPEN ECONOMY*

Constructing a two‐sector small open endogenous growth model with productive government spending, this paper examines patterns of specialization and the growth effects of fiscal policy. It is shown in this model that a change in income tax rate can cause a change in an equilibrium pattern of specialization. Because of this property, the relationship between the tax rate and the growth rate yields either a humped shape or a two‐humped shape, depending on world commodity prices. We also show that the growth maximizing tax rate is not necessarily equal to the tax rate that maximizes the level of social welfare.