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Optimal monetary policy with skill shock


  • Ryoji Hiraguchi

    () (Stanford University, Department of Economics)


da Costa and Werning (2005) prove that the Friedman rule of setting nominal interest rate to zero is locally optimal in a monetary model where each consumer receives a privately observed skill shock and the government uses incentive compatible non-linear income taxation. In this paper, we show that when goods and money are strictly separable from labor in the consumer's utility function, the Friedman rule is the globally optimal monetary policy. Positive nominal interest rate does not improve social welfare.

Suggested Citation

  • Ryoji Hiraguchi, 2007. "Optimal monetary policy with skill shock," Economics Bulletin, AccessEcon, vol. 5(15), pages 1-11.
  • Handle: RePEc:ebl:ecbull:eb-07n10001

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    References listed on IDEAS

    1. Iván Werning, 2007. "Optimal Fiscal Policy with Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 925-967.
    2. Carlos E. da Costa & Iván 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, February.
    3. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 1-30.
    4. V. V. Chari & Patrick J. Kehoe, 2006. "Modern Macroeconomics in Practice: How Theory Is Shaping Policy," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 3-28, Fall.
    5. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
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    More about this item


    Friedman rule;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


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