We study several popular monetary models which generate a non-degenerate stationary distribution of money holdings. Across these environments, our principal finding is as follows: a monetary policy that sets long run nominal interest rates to zero (the Friedman rule) does not typically maximize ex-post social welfare if it can generate redistributive effects. An increase in the rate of growth of the money supply has the standard partial-equilibrium effect of making money a less desirable asset thereby decreasing the utility of all moneyholders. A second, general-equilibrium effect, is a transfer from one type of agent to the other. For each environment, when the rate of growth of the money supply is not too high, an increase in the latter away from the Friedman rule may produce a transfer effect that dominates the partial equilibrium effect thereby rendering the Friedman rule ex-post suboptimal.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
11371.
Length: Date of creation: 09 Feb 2004 Date of revision: Publication status: Published in International Economic Review, May 2005. Handle: RePEc:isu:genres:11371
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Article
Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005.
"Heterogeneity, Redistribution, And The Friedman Rule,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, 05.
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Woodford, Michael, 1990.
"The optimum quantity of money,"
Handbook of Monetary Economics,
in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152
Elsevier.
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Edward J. Green & Ruilin Zhou, 2005.
"Money As A Mechanism In A Bewley Economy,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 351-371, 05.
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