Who is Afraid of the Friedman Rule
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2008-04-01
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Abstract
We explore the connection between optimal monetary policy and heterogeneity among agents in a standard monetary economy with two types of agents where the stationary distribution of money holdings is nondegenerate. 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 ex ante social welfare either. Indeed, one or, more surprisingly, both types may benefit if the central bank deviates from the Friedman rule.
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This article is published as Bhattacharya, Joydeep, Joseph Haslag, Antoine Martin, and Rajesh Singh. "Who is afraid of the Friedman rule?." Economic Inquiry 46, no. 2 (2008): 113-130.