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C. da Costa and I. Werning, “On the Optimality of the Friedman Rule with Heterogeneous Agents and Non- Linear Income Taxation,” Journal of Political Economy, Vol. 116, No. 1, 2008, pp. 82-112. doi:10.1086/529397

has been cited by the following article:

• TITLE: Credit, Externalities, and Nonoptimality of the Friedman Rule

  AUTHORS: Keiichiro Kobayashi, Masaru Inaba, Kengo Nutahara

  KEYWORDS: Externalities; Cash-Credit Model; Monetary Policy; Friedman Rule

  JOURNAL NAME: Theoretical Economics Letters, Vol.2 No.2, May 24, 2012

  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.