Liquidity, the Mundell–Tobin Effect, and the Friedman Rule

We investigate how a positive relation between inflation and capital investment (the Mundell–Tobin effect, MT-E) affects optimal monetary policy in framework that combines overlapping generations new Monetarist models. find rates above the Friedman rule are if only there is an MT-E. In absence of MT-E, optimal. With increasing leads to first-order welfare gain from investment, second-order loss reducing consumption markets where liquidity matters.