The optimality of the Friedman rule when some distorting taxes are exogenous
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The Friedman rule is a feature of optimal policies in several monetary models. However, if the Ramsey planner does not have access to a complete set of tax instruments, then that policy prescription often fails to be optimal. In this paper we investigate the relation between the optimality of the Friedman rule and existing tax instruments. The availability of consumption taxes constitutes a sufficient condition for the optimality of the Friedman rule. Moreover, there are cases in which these taxes are not available and that policy prescription is still optimal.
KeywordsFriedman rule Optimal monetary policy Exogenous taxes
JEL Classification NumbersE31 E52 E63 H21
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