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The Optimality Of The Friedman Rule When Some Distorting Taxes Are Exogenous

  • Alexandre B. Cunha

The Friedman rule is a feature of second-best policies in several monetary models. We extend this result by establishing that zero nominal interest rates can be optimal even if the Ramsey planner is not able to select many distorting tax rates. However, we show that the optimality of that policy prescription does depend on the set of tax rates the planner is able to choose. We also provide an intuitive way of assessing whether the Friedman rule is optimal for each particular set of tax rates the Ramsey planner is allowed to select.

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Paper provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its series Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] with number 45.

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Date of creation: 2006
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Handle: RePEc:anp:en2006:45
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  1. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Staff Report 147, Federal Reserve Bank of Minneapolis.
  2. Charles T. Carlstrom & Timothy S. Fuerst, 2002. "Optimal Monetary Policy in a Small, Open Economy: A General Equilibrium Analysis," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 10, pages 275-298 Central Bank of Chile.
  3. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc.
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  5. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman Rule in Economies with Distorting Taxes," NBER Working Papers 4443, National Bureau of Economic Research, Inc.
  6. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Anticipated Ramsey Reforms and the Uniform Taxation Principle: the Role of International Financial Markets," Departmental Working Papers 200210, Rutgers University, Department of Economics.
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  8. Peter N. Ireland, 2000. "Implementing the Friedman Rule," Boston College Working Papers in Economics 460, Boston College Department of Economics.
  9. 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, issue Spr, pages 2-10.
  10. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
  11. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy under Imperfect Competition," Departmental Working Papers 200101, Rutgers University, Department of Economics.
  13. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August.
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  15. Pablo Andres Neumeyer & Fernando Alvarez & Pat Kehoe, 2003. "The Time Consistency of Optimal Monetary and Fiscal Policies," Department of Economics Working Papers 005, Universidad Torcuato Di Tella.
  16. Bhattacharya, Joydeep & Haslag, Joseph & Russell, Steven, 2004. "The Role of Money in Two Alternative Models: When is the Friedman Rule Optimal, and Why?," Staff General Research Papers 11950, Iowa State University, Department of Economics.
  17. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  24. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 333-350, April.
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