Who is Afraid of the Friedman Rule?

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Who is Afraid of the Friedman Rule?

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Title: Who is Afraid of the Friedman Rule?
Author: Bhattacharya, Joydeep; Haslag, Joseph H.; Martin, Antoine; Singh, Rajesh
Keywords: Friedman rule
monetary policy
money-in-the-utility-function
Date: 2004-11-10
Publisher: Department of Economics
Citation: Department of Economics, 2004
Series/Report no.: Working papers (Department of Economics);WP 04-21
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.
URI: http://hdl.handle.net/10355/2643

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  • Economics publications (MU) [120]
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