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Who Is Afraid Of The Friedman Rule?

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  • JOYDEEP BHATTACHARYA
  • JOSEPH HASLAG
  • ANTOINE MARTIN
  • RAJESH SINGH

Abstract

"We explore the connection between optimal monetary policy and heterogeneity among agents in a standard monetary economy with two types of agents where the stationary distribution of money holdings is nondegenerate. Sans type-specific fiscal policy, we show that the zero-nominal-interest rate policy (the Friedman rule) does not maximize type-specific welfare; it may not maximize aggregate ex ante social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. "("JEL "E31, E51, E58) Copyright (c) 2007 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 46 (2008)
Issue (Month): 2 (04)
Pages: 113-130

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Handle: RePEc:bla:ecinqu:v:46:y:2008:i:2:p:113-130

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  1. Andrés Erosa & Gustavo Ventura, 2000. "On Inflation as a Regressive Consumption Tax," UWO Department of Economics Working Papers 20001, University of Western Ontario, Department of Economics.
  2. Albanesi, Stefania, 2003. "Optimal and Time-Consistent Monetary and Fiscal Policy with Heterogeneous Agents," CEPR Discussion Papers 3713, C.E.P.R. Discussion Papers.
  3. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman rule in economies with distorting taxes," Staff Report 158, Federal Reserve Bank of Minneapolis.
  4. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  5. Carlos E. da Costa & Iván Werning, 2008. "On the Optimality of the Friedman Rule with Heterogeneous Agents and Nonlinear Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 82-112, 02.
  6. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2004. "Heterogeneity, redistribution, and the Friedman rule," Research Working Paper RWP 04-01, Federal Reserve Bank of Kansas City.
  7. Chris Edmond, 2002. "Self-Insurance, Social Insurance, and the Optimum Quantity of Money," American Economic Review, American Economic Association, vol. 92(2), pages 141-147, May.
  8. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  9. Correia, Isabel & Teles, Pedro, 1996. "Is the Friedman rule optimal when money is an intermediate good?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 223-244, October.
  10. Edward J. Green & Ruilin Zhou, 2002. "Money as a mechanism in a Bewley economy," Working Paper Series WP-02-15, Federal Reserve Bank of Chicago.
  11. Beatrix Paal & Bruce D. Smith, 2001. "The sub-optimality of the Friedman rule and the optimum quantity of money," IEHAS Discussion Papers 0113, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  12. Peter Ireland, 2005. "The liquidity trap, the real balance effect, and the Friedman rule," Working Papers 05-3, Federal Reserve Bank of Boston.
  13. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
  14. Gahvari, Firouz, 1988. "Lump-sum taxation and the superneutrality and optimum quantity of money in life cycle growth models," Journal of Public Economics, Elsevier, vol. 36(3), pages 339-367, August.
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Cited by:
  1. Andolfatto, David, 2013. "Incentive-feasible deflation," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 383-390.
  2. Sofía Bauducco, 2011. "Seigniorage and Distortionary Taxation in a Model with Heterogeneous Agents and Idiosyncratic Uncertainty," Working Papers Central Bank of Chile 611, Central Bank of Chile.

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