Implementing the Friedman Rule by a Government Loan Program: An Overlapping Generations Model
AbstractThe welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I argue that implementing the Friedman rule by a government loan program may be better than implementing it by collecting taxes, even when lump sum taxes are possible. The government loan program will crowd out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0804.
Date of creation: Jan 2008
Date of revision:
Contact details of provider:
Web page: http://www.vanderbilt.edu/econ/wparchive/index.html
Government loans; welfare cost of inflation; money substitutes; wealth redistribution; Friedman rule;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-26 (All new papers)
- NEP-CBA-2008-01-26 (Central Banking)
- NEP-DGE-2008-01-26 (Dynamic General Equilibrium)
- NEP-MAC-2008-01-26 (Macroeconomics)
- NEP-MON-2008-01-26 (Monetary Economics)
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.:
- Carlos E. da Costa & IvÃ¡n 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.
- Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002.
"Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 110(1), pages 73-112, February.
- Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2000. "Money, interest rates, and exchange rates with endogenously segmented markets," Staff Report 278, Federal Reserve Bank of Minneapolis.
- Oliver Hart & John Moore, 1985.
"Incomplete Contracts and Renegotiation,"
367, Massachusetts Institute of Technology (MIT), Department of Economics.
- Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
- Mayshar, Joram, 1991. " Taxation with Costly Administration," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(1), pages 75-88.
- James Alt, 1983. "The evolution of tax structures," Public Choice, Springer, vol. 41(1), pages 181-222, January.
- Jeffrey R. Campbell & Zvi Hercowitz, 2004.
"The Dynamics of Work and Debt,"
NBER Working Papers
10201, National Bureau of Economic Research, Inc.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Chatterjee, Satyajit & Corbae, Dean, 1992.
"Endogenous Market Participation and the General Equilibrium Value of Money,"
Journal of Political Economy,
University of Chicago Press, vol. 100(3), pages 615-46, June.
- Chatterjee, S. & Corbae, D., 1990. "Endogenous Market Participation and the General Equelibrium Value of Money," Working Papers 90-30a, University of Iowa, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley).
If references are entirely missing, you can add them using this form.