THE FRIEDMAN RULE AND OPTIMAL MONETARY-POLICY

The appeal of Friedman's (1996) zero-nominal-interest-rate policy deri ves from the simplicity of the argument and the relative ease with whi ch it could be implemented. This paper shows, however, that there are likely many monetary policies (and inflation rates) consistent with a zero nominal interest rate, and social welfare varies across these pol icies. The main implication is that one ought to be careful in selecti ng a monetary policy to implement Friedman's proposal. This point is i llustrated in a model in which the Friedman Rule is desirable but the optimal monetary policy is different from that which is typically attr ibuted to Friedman's proposal.