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Implementing the Friedman Rule

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  • Peter N. Ireland

Abstract

In cash-in-advance models, necessary and sufficient conditions for the existence of an equilibrium with zero nominal interest rates and Pareto optimal allocations place restrictions mainly on the very long-run, or asymptotic, behavior of the money supply. When these asymptotic conditions are satisfied, they leave the central bank with a great deal of flexibility to manage the money supply over any finite horizon. But what happens when these asymptotic conditions fail to hold? This paper shows that the central bank can still implement the Friedman rule if its actions are appropriately constrained in the short run.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8821.

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Date of creation: Mar 2002
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Publication status: published as Ireland, Peter N. "Implementing The Friedman Rule," Review of Economic Dynamics, 2003, v6(1,Jan), 120-134.
Handle: RePEc:nbr:nberwo:8821

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  1. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 18(2), pages 203-20, April.
  2. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Jehiel, Philippe, 1998. "Repeated games and limited forecasting," European Economic Review, Elsevier, Elsevier, vol. 42(3-5), pages 543-551, May.
  4. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, Springer, vol. 4(3), pages 345-80.
  5. 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.
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Cited by:
  1. Peter N. Ireland, 2001. "The Real Balance Effect," NBER Working Papers 8136, National Bureau of Economic Research, Inc.
  2. Alexandre Cunha, 2008. "The optimality of the Friedman rule when some distorting taxes are exogenous," Economic Theory, Springer, Springer, vol. 35(2), pages 267-291, May.
  3. Buiter, Willem H. & Sibert, Anne C., 2007. "Deflationary Bubbles," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 11(04), pages 431-454, September.
  4. Peter N. Ireland, 2005. "The Liquidity Trap, The Real Balance Effect, And The Friedman Rule ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1271-1301, November.
  5. Ching-chong Lai & Chi-ting Chin, 2010. "(In)determinacy, increasing returns, and the optimality of the Friedman rule in an endogenously growing open economy," Economic Theory, Springer, Springer, vol. 44(1), pages 69-100, July.
  6. Alexandre Cunha, 2004. "The Friedman Rule in a Two Sector Small Open Economy," Econometric Society 2004 North American Summer Meetings, Econometric Society 530, Econometric Society.
  7. Dastjerdi, Rasul Bakhshi & Isfahani, Rahim Dalali, 2011. "Equity and economic growth, a theoretical and empirical study: MENA zone," Economic Modelling, Elsevier, Elsevier, vol. 28(1-2), pages 694-700, January.
  8. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers, Central Bank of Cyprus 2011-3, Central Bank of Cyprus.
  9. Peter Ireland, 2005. "EconomicDynamics Interviews Peter Ireland on Money and the Business Cycle," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 7(1), November.

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