Who is Afraid of the Friedman Rule?
32 Pages Posted: 11 Dec 2004
Date Written: May 2005
Abstract
We explore the connection between optimal monetary policy and heterogeneity among agents. We utilize a standard monetary economy with two types of agents that differ in the marginal utility they derive from real money balances - a framework that produces a nondegenerate stationary distribution of money holdings. Without type-specific fiscal policy, we show that the zero-nominal-interest-rate policy (the Friedman rule) does not maximize type-specific welfare; further, it may not maximize aggregate ex ante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the central bank deviates from the Friedman rule.
Keywords: Friedman rule, monetary policy, heterogeneous agents
JEL Classification: E31, E51, E58
Suggested Citation: Suggested Citation
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