TITLE:
Credit, Externalities, and Nonoptimality of the Friedman Rule
AUTHORS:
Keiichiro Kobayashi, Masaru Inaba, Kengo Nutahara
KEYWORDS:
Externalities; Cash-Credit Model; Monetary Policy; Friedman Rule
JOURNAL NAME:
Theoretical Economics Letters,
Vol.2 No.2,
May
24,
2012
ABSTRACT: We construct a cash-credit model with positive externalities in the production of credit goods. It is shown that under suitable conditions, the Friedman rule is not optimal and there exists an optimal nominal interest rate that maximizes the social welfare and output. This is because increasing the nominal interest rate improves sectoral misallocations caused by externalities in our economy.