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Credit, Externalities, and Nonoptimality of the Friedman Rule
Institute of Economic Research, Hitotsubashi University, Tokyo, Japan
The Canon Institute for Global Studies, Tokyo, Japan
Department of Economics, Senshu University, Kanagawa, Japan
- 1 Institute of Economic Research, Hitotsubashi University, Tokyo, Japan
- 2 The Canon Institute for Global Studies, Tokyo, Japan
- 3 Department of Economics, Senshu University, Kanagawa, Japan
Theoretical Economics Letters·Volume 02 (2012)·Pages 203–208·Published 23 May 2012·DOI10.4236/tel.2012.22036
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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.
KeywordsExternalitiesCash-Credit ModelMonetary PolicyFriedman Rule
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