Selection of Efficient Monetary Equilibria Through Aggregate Real Savings-Based Taylor Rule

Abstract

This paper uses the generalized Cass criterion $\sum^{\infty}_{t=1}(\Vert p_{t}\Vert\sum_{h\in G_{t}}\Vert e^{h}_{t}\Vert)^{-1}=\infty$ to extend the results from Dognini (2026) regarding the existence of efficient monetary equilibria on consumption-loan overlapping generations economies. These results reveal that if the economy is prone to savings, then monetary equilibria will emerge in a pure non-stationary general equilibrium model with heterogeneous households, thus providing a solution to the Hahn (1965) problem. It is also proved that, in prone-to-savings economies, non-vanishing relative aggregate real savings fully characterize efficient monetary equilibria. I use this result to show that a Taylor rule based on an inflation ceiling and a relative aggregate real savings floor can be used to control the price level and lead the economy towards an efficient monetary equilibrium. In contrast, a Taylor rule based solely on an inflation target is able to control the price level but generally leads the economy towards an inefficient monetary equilibrium.