Real Transfers and the Friedman Rule

26 Pages Posted: 29 Apr 2016 Last revised: 27 Oct 2017

See all articles by Bernardino Adao

Bernardino Adao

Bank of Portugal - Research Department

Andre C. Silva

Nova School of Business and Economics

Date Written: October 1, 2017

Abstract

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

Adao, Bernardino and Silva, Andre C., Real Transfers and the Friedman Rule (October 1, 2017). Available at SSRN: https://ssrn.com/abstract=2772487 or http://dx.doi.org/10.2139/ssrn.2772487

Bernardino Adao

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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