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Time-Inconsistent Discounting and the Friedman Rule: The Role of Non-Unitary Discounting

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  • Takeo Hori

    () (Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology)

  • Koichi Futagami

    () (Graduate School of Economics, Osaka University)

Abstract

We examine the optimality of the Friedman rule by considering recent developments in behavioral economics. We construct a simple macroeconomic model where agents discount consumption and leisure at different rates. We also consider a standard exponential discounting model and a hyperbolic discounting model, assuming that the same discounting applies to both consumption and leisure. Money is introduced via a cash-in-advance constraint. Although the three models are observationally equivalent, they provide different policy implications. The Friedman rule is optimal in the latter two models, whereas it is not optimal in the first model when agents discount consumption at a higher rate than leisure.

Suggested Citation

  • Takeo Hori & Koichi Futagami, 2018. "Time-Inconsistent Discounting and the Friedman Rule: The Role of Non-Unitary Discounting," Discussion Papers in Economics and Business 18-04, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:1804
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    More about this item

    Keywords

    Non-unitary discount rate; Hyperbolic discounting; Exponential discounting; Friedman rule; Optimal inflation;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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