Who is Afraid of the Friedman Rule?

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

Staff General Research Papers Archive 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.

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)
Date: 2004-11-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in Economic Inquiry, April 2008, vol. 46 no. 2, pp. 113-130

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

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