Who is Afraid of the Friedman Rule?

In this paper, we explore the connection between optimal monetary policy and heterogeneityamong agents. We study a standard monetary economy with two types of agents inwhich the stationary distribution of money holdings is non-degenerate. Sans type-specific fiscalpolicy, we show that the zero-nominal-interest rate policy (the Friedman rule) does not maximizetype-specific welfare; it may not maximize aggregate social welfare either. Indeed, one or, moresurprisingly, both types may benefit if the central bank deviates from the Friedman rule. Ourresults suggest a positive explanation for why central banks around the world do not implementthe Friedman rule.[...]