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The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse

  • Benjamin Eden

    ()

    (Department of Economics, Vanderbilt University)

The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I focus on a government loan program that crowds out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.

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File URL: http://www.accessecon.com/pubs/VUECON/vu07-w17.pdf
File Function: First version, 2007
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0717.

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Date of creation: Nov 2007
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Handle: RePEc:van:wpaper:0717
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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