Staff Report 158

Optimality of the Friedman Rule in Economies With Distorting Taxes

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
V. V. Chari | Consultant
Lawrence J. Christiano | Consultant

Published July 1, 1993

We find conditions for the Friedman rule to be optimal in three standard models of money. These conditions are homotheticity and separability assumptions on preferences similar to those in the public finance literature on optimal uniform commodity taxation. We show that there is no connection between our results and the result in the standard public finance literature that intermediate goods should not be taxed.

Published In: Journal of Monetary Economics (Vol. 37, No. 2, April 1996, pp. 203-223)

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