The Friedman rule: Old and new

Research output: Contribution to journalArticlepeer-review


In overlapping generations models, money growth creates intergenerational wealth effects and leads to the breakdown of the Friedman rule; the rule can be restored via lump-sum tax and transfers that neutralize these wealth transfers. Additionally, and in contrast to money-in-the-utility-function models, the Friedman rule is not the unique first-best solution in cash-in-advance-constraint models of money: a continuum of combinations of money growth rates and consumption taxes implement the first-best allocation. This paper traces through the intellectual origins of the first (old) result, which was recently restated in Bhattacharya, et al. [2005. Monetary policy, fiscal policy, and the inflation tax: equivalence results. Macroeconomic Dynamics 7, 647-669.] and formally demonstrates the second (new) result.

Original languageEnglish (US)
Pages (from-to)581-589
Number of pages9
JournalJournal of Monetary Economics
Issue number2
StatePublished - Mar 2007


  • Friedman rule
  • Intergenerational wealth effects
  • Overlapping generations

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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