Real Transfers and the Friedman Rule
26 Pages Posted: 29 Apr 2016 Last revised: 27 Oct 2017
Date Written: October 1, 2017
We find that the Friedman rule is not optimal with real government transfers and distortionary taxation. As transfers cannot be taxed, a positive nominal net interest rate is the indirect way to tax the additional income derived from transfers. This result holds for heterogeneous agents, standard homogeneous preferences, and constant returns to scale production functions. The presence of real transfers changes the standard optimal taxation result of uniform taxation. Higher transfers imply higher optimal inflation rate. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule.
Keywords: Friedman rule, fiscal policy, monetary policy, taxes, transfers, inflation
JEL Classification: E52, E62, E63
Suggested Citation: Suggested Citation