Inflation aversion and macroeconomic policy in a perfect foresight monetary model

This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing inflation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.

Research highlights► Money is not superneutral in the monetary economy with inflation aversion. ► Friedman's optimum quantity of money is not optimal. ► A permanent increase of inflation has negative effects on the economy. ► An increase of government expenditures has negative effects on the economy.