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Implementing the Friedman Rule

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  • Peter N. Ireland

    () (Boston College)

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 only 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.

Suggested Citation

  • Peter N. Ireland, 2000. "Implementing the Friedman Rule," Boston College Working Papers in Economics 460, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:460
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    References listed on IDEAS

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    1. Jehiel, Philippe, 1998. "Repeated games and limited forecasting," European Economic Review, Elsevier, vol. 42(3-5), pages 543-551, May.
    2. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    3. 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.
    4. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
    5. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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    Citations

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    Cited by:

    1. Peter N. Ireland, 2001. "The Real Balance Effect," Boston College Working Papers in Economics 491, Boston College Department of Economics.
    2. Al-Jarhi, Mabid, 2017. "Inefficiencies in Search Models: The Case for Islamic Finance," MPRA Paper 82064, University Library of Munich, Germany, revised 19 Oct 2017.
    3. Ryoji Hiraguchi, 2014. "Optimal Monetary Policy in OLG Models with Long-Lived Agents: A Note," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(1), pages 164-172, February.
    4. Buiter, Willem H. & Sibert, Anne C., 2007. "Deflationary Bubbles," Macroeconomic Dynamics, Cambridge University Press, vol. 11(04), pages 431-454, September.
    5. 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, vol. 46(4), pages 1271-1301, November.
    6. Alexandre Cunha, 2004. "The Friedman Rule in a Two Sector Small Open Economy," Econometric Society 2004 North American Summer Meetings 530, Econometric Society.
    7. Al-Jarhi, Mabid, 2000. "السياسات النقدية في إطار إسلامي
      [Monetary Policy in an Islamic Framework]
      ," MPRA Paper 67547, University Library of Munich, Germany, revised 2002.
    8. Peter Ireland, 2005. "EconomicDynamics Interviews Peter Ireland on Money and the Business Cycle," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 7(1), November.
    9. Alexandre Cunha, 2008. "The optimality of the Friedman rule when some distorting taxes are exogenous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 267-291, May.
    10. Cunha, Alexandre B., 2005. "Managing Public Debt, Money Supply and Foreign Assets: Some Indeterminacy Results," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 59(3), July.
    11. Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    12. Al-Jarhi, Mabid, 2016. "An economic theory of Islamic finance," MPRA Paper 72698, University Library of Munich, Germany.
    13. Dastjerdi, Rasul Bakhshi & Isfahani, Rahim Dalali, 2011. "Equity and economic growth, a theoretical and empirical study: MENA zone," Economic Modelling, Elsevier, vol. 28(1-2), pages 694-700, January.
    14. Dastjerdi, Rasul Bakhshi & Isfahani, Rahim Dalali, 2011. "Equity and economic growth, a theoretical and empirical study: MENA zone," Economic Modelling, Elsevier, vol. 28(1), pages 694-700.
    15. Al-Jarhi, Mabid, 2004. "The Philosophy of Islamic Banking and Finance," MPRA Paper 66739, University Library of Munich, Germany, revised 2007.
    16. 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;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 69-100, July.

    More about this item

    Keywords

    Friedman Rule; Optimal Monetary Policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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