Redistribution and Optimal Monetary Policy: Results and Open Questions

What are the properties of optimal fiscal and monetary policies with heterogeneous agents? This is a pressing question, given the wealth of evidence on heterogeneity in cash holdings and labor income. Yet, until recently it remained largely unexplored. In this paper, I show that with heterogeneity the Friedman rule is optimal only if positive nominal interest rates do not ameliorate constraints on redistribution. With an empirically plausible cross-sectional correlation between money holdings and labor income, the Friedman rule is optimal if the government favors redistribution to the poor. I discuss these findings and propose several directions for future research.