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

Benjamin Eden ()

No 804, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: 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.

Keywords: Government loans; welfare cost of inflation; money substitutes; wealth redistribution; Friedman rule (search for similar items in EconPapers)
JEL-codes: E42 E51 E52 E58 H20 H21 H26 (search for similar items in EconPapers)
Date: 2008-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0804

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