OPTIMAL MONETARY POLICY WITH FINITE LIFETIMES

Abstract

In a two-period overlapping generations context, postulating the instantaneous social welfare function consisting of utilities of generations who live at that time and defining their discounted sum as the social objective, it is shown that optimal monetary policy depends on income distribution between generations within a period and on relative social marginal weights to the generations, and that, even when income distribution is optimized, i.e., even in the first-best optimum, the optimal money growth rate is not equal to the social discount factor unless the planner attaches to the working generation the relative weight equal to the social discount factor.