Real transfers and the Friedman rule

Bernardino Adão and Andre Silva ()
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Bernardino Adão: Banco de Portugal

Economic Theory, 2019, vol. 67, issue 1, No 5, 155-177

Abstract: Abstract We find that the Friedman rule is not optimal with real government transfers and distortionary taxation. As transfers cannot be taxed, a positive nominal net interest rate is the indirect way to tax the additional income derived from transfers. This result holds for heterogeneous agents, standard homogeneous preferences, and constant returns to scale production functions. The presence of real transfers changes the standard optimal taxation result of uniform taxation. Higher transfers imply higher optimal inflation rates. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule.

Keywords: Friedman rule; Fiscal policy; Monetary policy; Taxes; Transfers; Inflation (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 H21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00199-018-1105-0

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