OPTIMALITY OF THE FRIEDMAN RULE IN ECONOMIES WITH DISTORTING TAXES

We find conditions for the Friedman rule to be optimal in three standa rd monetary models. Our main contribution is to shed light on two issu es in the literature. First, the conventional view maintains that when money is a final good, its services should be taxed. Moreover, if mon ey demand is interest-inelastic, its services should be taxed heavily. We show that this view is incorrect. Second, there is an ongoing cont roversy about whether the optimality of the Friedman rule is connected to the intermediate goods result from public finance. We resolve this controversy by showing a deep connection between these results.