Economic Theory

, Volume 67, Issue 1, pp 155–177 | Cite as

Real transfers and the Friedman rule

  • Bernardino Adão
  • André C. SilvaEmail author
Research Article


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.


Friedman rule Fiscal policy Monetary policy Taxes Transfers Inflation 

JEL Classification

E52 E62 E63 H21 



We are grateful for the comments and suggestions of Tiago Cavalcanti and two anonymous referees. We are also grateful for the discussions and suggestions of Carlos da Costa, Juan Pablo Nicolini and Pedro Teles.


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Departamento de Estudos Económicos (DEE)Banco de PortugalLisbonPortugal
  2. 2.Nova School of Business and EconomicsUniversidade NOVA de LisboaLisbonPortugal

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