Staff Reports
Who Is Afraid of the Friedman Rule?
May 2005 Number 208
JEL classification: E31, E51, E58

Authors: Joydeep Bhattacharya, Joseph Haslag, Antoine Martin, and Rajesh Singh

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 exante social welfare. Indeed one or, more surprisingly, both types of agents may benefit if the central bank deviates from the Friedman rule.

Available only in PDF PDF32 pages / 342 kb

For a published version of this report, see Joydeep Bhattacharya, Joseph Haslag, Antoine Martin, and Rajesh Singh, "Who Is Afraid of the Friedman Rule?" Economic Inquiry 46, no. 2 (April 2008): 113-30.

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