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Wealth Inequality And Optimal Monetary Policy

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  • Hiraguchi, Ryoji

Abstract

We study the money-in-the-utility-function model in which agents are heterogeneous in their initial wealth. We show that the Friedman rule is not optimal even if the government uses nonlinear income taxation for redistribution. A positive nominal interest rate raises social welfare because it relaxes the incentive compatibility constraint for highly endowed agents. Although the setup is close to that of da Costa and Werning [Journal of Political Economy (2008) 116, 82–112], who investigate skill heterogeneity, the role of the nominal interest rate in this paper here differs from the one in their model.

Suggested Citation

  • Hiraguchi, Ryoji, 2010. "Wealth Inequality And Optimal Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(5), pages 629-644, November.
    • Handle: RePEc:cup:macdyn:v:14:y:2010:i:05:p:629-644_99
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