Heterogeneity, Redistribution, and the Friedman Rule

By Joydeep Bhattacharya, Joseph H. Haslag, and Antoine Martin
February 2004; Last Revised September 2004 
RWP 04-01
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      We study monetary models with non-degenerate stationary distribution of money holdings. We find that the Friedman rule does not typically maximize ex-post social welfare. An increase in the rate of growth of the money supply has two effects: the standard distortionary, or rate-of-return, effect makes money a less desirable asset for all moneyholders. A second, redistributive effect, creates a transfer from one type of agent to the other. An increase in the rate of growth on money away from the Friedman rule can produce a rate-of-return effect that dominates the standard effect.

Keywords: Friedman rule, monetary policy, redistribution, heterogeneity

JEL Codes: E31, E52, H23

Joydeep Bhattacharya is an associate professor at Iowa State University. Joseph H. Haslag is an associate professor at the University of Missouri--Columbia. Antoine Martin is an economist at the Federal Reserve Bank of Kansas City. The authors would like to thank two anonymous referees, Peter Ireland, Narayana Kocherlakota, Steve Russell, Rajesh Singh, Chris Waller and Randy Wright as well as seminar participants at UCSB, the University of Alberta, the University of Kentucky, the Missouri Economic Conference (2004) and the Models of Monetary Economies II: The Next Generation Conference for useful comments.  The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Martin e-mail:  antoine.martin@kc.frb.org

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