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The Friedman Rule in an Overlapping Generations Model: Social Security in Reverse

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Author Info
Benjamin Eden () (Department of Economics, Vanderbilt University)

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Abstract

The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I focus on a government loan program that crowds out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu07-w17.pdf
File Format: application/pdf
File Function: First version, 2007
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0717.

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Date of creation: Nov 2007
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Handle: RePEc:van:wpaper:0717

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Related research
Keywords: Welfare cost of inflation; money substitutes; wealth redistribution; Friedman rule;

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion

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References listed on IDEAS
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  1. Correia, Maria Isabel Horta & Teles, Pedro, 1996. "Is the Friedman Rule Optimal When Money is an Intermediate Good?," CEPR Discussion Papers 1287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction Services, Inflation, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1274-1301, December. [Downloadable!] (restricted)
    Other versions:
  3. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  4. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June. [Downloadable!] (restricted)
  5. Mayshar, Joram, 1991. " Taxation with Costly Administration," Scandinavian Journal of Economics, Blackwell Publishing, vol. 93(1), pages 75-88.
  6. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September. [Downloadable!] (restricted)
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  7. Ana Castañeda & Javier Díaz-Giménez & José-Víctor Ríos-Rull, . ""Earnings and Wealth Inequality and Income Taxation: Quantifying the Trade-Offs of Switching to a Proportional Income Tax in the U.S.''," CARESS Working Papres 98-14, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences. [Downloadable!]
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  8. Bordo, Michael D. & Vegh, Carlos A., 2002. "What if Alexander Hamilton had been Argentinean? A comparison of the early monetary experiences of Argentina and the United States," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 459-494, April. [Downloadable!] (restricted)
    Other versions:
  9. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April. [Downloadable!] (restricted)
    Other versions:
  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  11. David Altig et al., 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June. [Downloadable!] (restricted)
  12. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  13. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    Other versions:
  14. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November. [Downloadable!] (restricted)
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