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Who is Afraid of the Friedman Rule?

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Abstract

In this paper, we explore the connection between optimal monetary policy and heterogeneity among agents. We study a standard monetary economy with two types of agents in which the stationary distribution of money holdings is non-degenerate. Sans type-specific fiscal policy, we show that the zero-nominal-interest rate policy (the Friedman rule) does not maximize type-specific welfare; it may not maximize aggregate social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule. Our results suggest a positive explanation for why central banks around the world do not implement the Friedman rule.

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  • Joseph H. Haslag & Joydeep Bhattacharya & Antoine Martin & Rajesh Singh, 2004. "Who is Afraid of the Friedman Rule?," Working Papers 0421, Department of Economics, University of Missouri, revised 21 Dec 2004.
  • Handle: RePEc:umc:wpaper:0421
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    Cited by:

    1. Philip Arestis & Alexander Mihailov, 2011. "Classifying Monetary Economics: Fields And Methods From Past To Future," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 769-800, September.
    2. Sofía Bauducco, 2011. "Seigniorage and Distortionary Taxation in a Model with Heterogeneous Agents and Idiosyncratic Uncertainty," Working Papers Central Bank of Chile 611, Central Bank of Chile.
    3. TINA M. Edgar A. Ghossoub & TINA M. Robert R. Reedy, 2012. "Financial Development and the Distributional Effects of Monetary Policy Do the distributional consequences of monetary policy depend on the extent of financial development? Should optimal monetary pol," Working Papers 0035, College of Business, University of Texas at San Antonio.
    4. Andolfatto, David, 2013. "Incentive-feasible deflation," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 383-390.
    5. Ghossoub, Edgar A. & Reed, Robert R., 2017. "Financial development, income inequality, and the redistributive effects of monetary policy," Journal of Development Economics, Elsevier, vol. 126(C), pages 167-189.

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    More about this item

    Keywords

    Friedman rule; monetary policy; money-in-the-utility-function;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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