Should we be afraid of Friedman's rule?

Harald Uhlig ()

Macroeconomics from University Library of Munich, Germany

Abstract: Should one think of zero nominal interest rates as an undesirable liquidity trap or as the desirable Friedman rule? I use three different frameworks to discuss this issue. First, I restate Cole and Kocherlakota's (1998) analysis of Friedman's rule: short run increases in the money stock - whether through issuing spending coupons, open market operations or foreign exchange intervention - change nothing as long as the money stock shrinks in the long run. Second, two simple ``Keynesian'' models of the inflationary process with a zero lower bound on nominal interest rates imply either that deflationary spirals should be common or that a policy close to the Friedman rule and thus some deflation is optimal. Finally, a formal ``baby-sitting coop'' model implies multiple equilibria, but does not support the injection of liquidity to restore the good equilibrium, in contrast to Krugman (1998).

Keywords: Friedman's rule; liquidity trap; cash in advance; baby sitting coop; zero lower bound on nominal interest rates; deflation; deflationary spiral; Japan; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E41 E50 E51 E52 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2000-06-27
New Economics Papers: this item is included in nep-ifn and nep-mon
Note: Type of Document - .pdf; prepared on PC (TeX); to print on Acrobat Reader: print from there; pages: 55; figures: included. prepared for the TRIO conference in Japan, December 1999
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: Should We Be Afraid of Friedman's Rule? (2000)
Working Paper: Should We be Afraid of Friedman's Rule? (2000)
Working Paper: Should we be Afraid of Friedman's Rule? (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0004016

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