Author(s)

Keiichiro Kobayashi, Masaru Inaba, Kengo Nutahara

Department of Economics, Senshu University, Kanagawa, Japan.
Institute of Economic Research, Hitotsubashi University, Tokyo, Japan.
The Canon Institute for Global Studies, Tokyo, Japan.

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.

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

K. Kobayashi, M. Inaba and K. Nutahara, "Credit, Externalities, and Nonoptimality of the Friedman Rule," Theoretical Economics Letters, Vol. 2 No. 2, 2012, pp. 203-208. doi: 10.4236/tel.2012.22036.