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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

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

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