Who is Afraid of the Friedman Rule?

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

No 421, Working Papers from Department of Economics, University of Missouri

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.

Keywords: Friedman rule; monetary policy; money-in-the-utility-function (search for similar items in EconPapers)
JEL-codes: E31 E51 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2004-12-21, Revised 2004-12-21
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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:umc:wpaper:0421

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