Real transfers and the Friedman rule

Bernardino Adão, André C. Silva

Research output: Contribution to journalArticle

1 Citation (Scopus)
13 Downloads (Pure)

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 rates. We calibrate a model with transfers to the US economy and obtain optimal values for inflation substantially above the Friedman rule.

Original languageEnglish
Pages (from-to)155-177
Number of pages23
JournalEconomic Theory
Volume67
Issue number1
DOIs
Publication statusPublished - Feb 2019

Keywords

  • Fiscal policy
  • Friedman rule
  • Inflation
  • Monetary policy
  • Taxes
  • Transfers

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