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Implementing the Friedman Rule by a Government Loan Program: An Overlapping Generations Model

  • Benjamin Eden

    ()

    (Department of Economics, Vanderbilt University)

The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I argue that implementing the Friedman rule by a government loan program may be better than implementing it by collecting taxes, even when lump sum taxes are possible. The government loan program will crowd 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/vu08-w04.pdf
File Function: First version, 2008
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0804.

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Date of creation: Jan 2008
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Handle: RePEc:van:wpaper:0804
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  1. Chatterjee, S. & Corbae, D., 1990. "Endogenous Market Participation and the General Equelibrium Value of Money," Working Papers 90-30a, University of Iowa, Department of Economics.
  2. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
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  4. Jeffrey R. Campbell & Zvi Hercowitz, 2004. "The dynamics of work and debt," Working Paper Series WP-04-05, Federal Reserve Bank of Chicago.
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  6. Hardman Moore, John & Hart, Oliver, 1985. "Incomplete Contracts and Renegotiation," CEPR Discussion Papers 60, C.E.P.R. Discussion Papers.
  7. James Alt, 1983. "The evolution of tax structures," Public Choice, Springer, vol. 41(1), pages 181-222, January.
  8. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  9. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  10. Carlos E. da Costa & Iván Werning, 2008. "On the Optimality of the Friedman Rule with Heterogeneous Agents and Nonlinear Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 82-112, 02.
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