Heterogeneity, Redistribution, and the Friedman Rule

FRB of Kansas City Working Paper No. 04-01

40 Pages Posted: 5 Aug 2004  

Joydeep Bhattacharya

Iowa State University - Department of Economics

Joseph Haslag

University of Missouri at Columbia - Department of Economics

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2004

Abstract

We study several popular monetary models which generate a nondegenerate stationary distribution of money holdings. Across these environments, our principal finding is as follows: a monetary policy that sets long run nominal interest rates to zero (the Friedman rule) does not typically maximize ex-post social welfare if it can generate redistributive effects. An increase in the rate of growth of the money supply has the standard partial-equilibrium effect of making money a less desirable asset thereby decreasing the utility of all moneyholders. A second, general-equilibrium effect, is a transfer from one type of agent to the other. For each environment, when the rate of growth of the money supply is not too high, an increase in the latter away from the Friedman rule may produce a transfer effect that dominates the partial equilibrium effect thereby rendering the Friedman rule ex-post suboptimal.

Keywords: Friedman Rule, Monetary Policy, Redistribution, Hetergeneity

JEL Classification: E31, E52, H23

Suggested Citation

Bhattacharya, Joydeep and Haslag, Joseph and Martin, Antoine, Heterogeneity, Redistribution, and the Friedman Rule (February 2004). FRB of Kansas City Working Paper No. 04-01. Available at SSRN: https://ssrn.com/abstract=562541 or http://dx.doi.org/10.2139/ssrn.562541

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Joseph Haslag

University of Missouri at Columbia - Department of Economics ( email )

118 Professional Building
Columbia, MO 65211
United States

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

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