WEALTH INEQUALITY AND OPTIMAL MONETARY POLICY

Ryoji Hiraguchi ()

Macroeconomic Dynamics, 2010, vol. 14, issue 5, 629-644

Abstract: We study the money-in-the-utility-function model in which agents are heterogeneous in their initial wealth. We show that the Friedman rule is not optimal even if the government uses nonlinear income taxation for redistribution. A positive nominal interest rate raises social welfare because it relaxes the incentive compatibility constraint for highly endowed agents. Although the setup is close to that of da Costa and Werning [Journal of Political Economy (2008) 116, 82–112], who investigate skill heterogeneity, the role of the nominal interest rate in this paper here differs from the one in their model.

Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:14:y:2010:i:05:p:629-644_99

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