Document Type

Working Paper

Publication Date


Working Paper Number

WP #04004, February 2004; Old working paper #11371


We study several popular monetary models which generate a non-degenerate stationary distribution of money holdings. Across these environments, our principal finding is as follows: a monetary policy that sets long run nominal interest rates to zero (the Friedman rule) does not typically maximize ex-post social welfare if it can generate redistributive effects. An increase in the rate of growth of the money supply has the standard partial-equilibrium effect of making money a less desirable asset thereby decreasing the utility of all moneyholders. A second, general-equilibrium effect, is a transfer from one type of agent to the other. For each environment, when the rate of growth of the money supply is not too high, an increase in the latter away from the Friedman rule may produce a transfer effect that dominates the partial equilibrium effect thereby rendering the Friedman rule ex-post suboptimal.

Publication Status

Published in International Economic Review, Vol. 46 no. 2 (May 2005): 305-729.

JEL Classification

E31, E52, H23

File Format



41 pages

Included in

Economics Commons