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WEALTH INEQUALITY AND OPTIMAL MONETARY POLICY

Published online by Cambridge University Press:  10 June 2010

Ryoji Hiraguchi
Ryoji Hiraguchi*
Affiliation:
Ritsumeikan University
*
Address correspondence to: Ryoji Hiraguchi, 1-1-1, Nojihigashi, Kusatsu, Shiga, Japan; e-mail: rhira@fc.ritsumei.ac.jp.
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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.

Keywords

Monetary PolicyPrivate InformationFriedman Rule
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 5 , November 2010 , pp. 629 - 644
Copyright
Copyright © Cambridge University Press 2010

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