The Role of Money in Two Alternative Models:When is the Friedman Rule Optimal, and Why?

In models of money with an infinitely-lived representative agent (ILRA models), the optimal monetary policyis almost always the Friedman rule. Overlapping generations (OG) models are different: in this paper, westudy how they are different, and why. We investigate the welfare properties of monetary policy in a simpleOG model under two different types of money demand specifications and under two alternative assumptionsabout the generational timing of taxes for money retirement. We find that the Friedman rule is generallynot the policy that maximizes steady-state utility. We conclude that the key difference between ILRA andOG monetary models is that in the latter, the standard method for constructing a monetary regime causestransactions involving money to become intergenerational transfers. Overlapping generations are different inthis regard; we study how they are different and why.[...]