Implementing the Friedman Rule by a Government Loan Program: An Overlapping Generations Model
The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I argue that implementing the Friedman rule by a government loan program may be better than implementing it by collecting taxes, even when lump sum taxes are possible. The government loan program will crowd 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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Eden, Benjamin (Vanderbilt University, 2007)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 ...
Eden, Benjamin (Vanderbilt University, 2009)The paper assumes a government advantage in collecting income contingent payments and develop a proposal for a government loan program that is an integral part of the tax system. The focus is on administrative costs and ...
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