Sub-Optimality of the Friedman Rule with Distorting Taxes

Bernardino Adão and Andre Silva ()

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We find that the Friedman rule is not optimal with government transfers and distortionary taxation. This result holds for heterogeneous agents, standard homogeneous preferences, and constant returns to scale production functions. The presence of transfers changes the standard optimal taxation result of uniform taxation. As transfers cannot be taxed, a positive nominal net interest rate is the indirect way to tax the additional income derived from transfers. The higher the transfers, the higher is the optimal inflation rate. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule.

JEL-codes: E52 E62 E63 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pub
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Related works:
Working Paper: Sub-optimality of the Friedman rule with distorting taxes (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201803

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