In this paper, we explore the connection between optimal monetary policy and heterogeneity among agents. We study a standard monetary economy with two types of agents in which the stationary distribution of money holdings is non-degenerate. 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 social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. Our results suggest a positive explanation for why central banks around the world do not implement the Friedman rule.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12213.
Length: Date of creation: 10 Nov 2004 Date of revision: Publication status: Published in Economic Inquiry, 2008, Vol. 46, No. 2, pp. 113-130. Handle: RePEc:isu:genres:12213
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Article
Joydeep Bhattacharya & Joseph Haslag & Antoine Martin & Rajesh Singh, 2008.
"Who Is Afraid Of The Friedman Rule?,"
Economic Inquiry,
Western Economic Association International, vol. 46(2), pages 113-130, 04.
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Joseph H. Haslag & Joydeep Bhattacharya & Antoine Martin & Rajesh Singh, 2004.
"Who is Afraid of the Friedman Rule?,"
Working Papers
0421, Department of Economics, University of Missouri, revised 21 Dec 2004.
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Find related papers by JEL classification: E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
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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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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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