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WHO IS AFRAID OF THE FRIEDMAN RULE?
Author(s) -
BHATTACHARYA JOYDEEP,
HASLAG JOSEPH,
MARTIN ANTOINE,
SINGH RAJESH
Publication year - 2008
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2007.00068.x
Subject(s) - economics , friedman rule , monetary policy , welfare , ex ante , monetary economics , fiscal policy , keynesian economics , microeconomics , mathematical economics , market economy
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. ( JEL E31, E51, E58)