Who is Afraid of the Friedman Rule?

Joydeep Bhattacharya (), Joseph Haslag (), Antoine Martin () and Rajesh Singh ()

Staff General Research Papers from Iowa State University, Department of Economics

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.

JEL-codes: E4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2004-11-10
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Published in Economic Inquiry, 2008, Vol. 46, No. 2, pp. 113-130.

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Related works:
Working Paper: Who is afraid of the Friedman rule? (2005)
Working Paper: Who is Afraid of the Friedman Rule? (2004)
Journal Article: WHO IS AFRAID OF THE FRIEDMAN RULE? (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12213

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