Alternative Monetary Policies in a Turnpike Economy*

A version of a Townsend turnpike model is described in which agents stay at a location long enough to trade some consumption loans, but not long enough to support an Arrow-Debreu allocation. Monetary equilibria exist which are non-optimal in the absence of a scheme to pay interest on currency at a particular rate. Paying interest on currency at the optimal rate delivers a Pareto optimal allocation, but a diierent one than the allocation for an associated nonmonetary centralized economy. The price level remains determinate under an optimal policy. The paper brieey studies the response of the model to \helicopter drops" of currency, steady increases in the money supply, and restrictions on private intermediation. * This paper is based on an earlier paper by the authors entitled \Longer Trading Periods in the Townsend Turnpike Model." We received very helpful comments on the earlier paper from David Romer and Robert Townsend, for which we thank them. The work of both authors was supported by grants from the National Science Foundation.