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The Friedman Rule in a Two Sector Small Open Economy

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  • Alexandre Cunha

Abstract

This paper investigates the properties of optimal monetary and fiscal policy in a two sector small open economy. If the government can optimally select all possible distorting tax rates, then it can implement Pareto efficient outcomes and the Friedman Rule is found to be a necessary condition for this. If the government can select only some of these tax rates, then second best policies may also display the Friedman rule as a feature. However, this last result depends on the set of tax instruments the government can choose from

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 530.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:530

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Keywords: Friedman rule; optimal taxation; open economy;

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  1. Harold L. Cole & Narayana R. Kocherlakota, 1998. "Zero nominal interest rates: why they're good and how to get them," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-10.
  2. De Fiore, Fiorella & Teles, Pedro, 2003. "The optimal mix of taxes on money, consumption and income," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(4), pages 871-887, May.
  3. Peter N. Ireland, 2000. "Implementing the Friedman Rule," Boston College Working Papers in Economics, Boston College Department of Economics 460, Boston College Department of Economics.
  4. Correia, Isabel & Teles, Pedro, 1996. "Is the Friedman rule optimal when money is an intermediate good?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 223-244, October.
  5. de V. Cavalcanti, Tiago V. & Villamil, Anne P., 2003. "Optimal Inflation Tax And Structural Reform," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 7(03), pages 333-362, June.
  6. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  7. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, Elsevier, vol. 114(2), pages 198-230, February.
  8. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 203-223, April.
  9. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
  10. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(5), pages 919-44, October.
  11. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Anticipated Ramsey Reforms and the Uniform Taxation Principle: The Role of International Financial Markets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3438, C.E.P.R. Discussion Papers.
  12. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(2), pages 333-350, April.
  13. repec:cup:macdyn:v:7:y:2003:i:3:p:333-62 is not listed on IDEAS
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