Optimal monetary policy with skill shock

Ryoji Hiraguchi ()

Economics Bulletin, 2007, vol. 5, issue 15, 1-11

Abstract: da Costa and Werning (2005) prove that the Friedman rule of setting nominal interest rate to zero is locally optimal in a monetary model where each consumer receives a privately observed skill shock and the government uses incentive compatible non-linear income taxation. In this paper, we show that when goods and money are strictly separable from labor in the consumer's utility function, the Friedman rule is the globally optimal monetary policy. Positive nominal interest rate does not improve social welfare.

Keywords: Friedman; rule (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2007-09-18
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