Technical Report Time-Inconsistent Discounting and the Friedman Rule : The Role of Non-Unitary Discounting

Futagami, Koichi  ,  Hori, Takeo

18-04pp.1 - 16 , 2018-02-13 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
Description
We examine the optimality of the Friedman rule by considering recent developments in behavioral economics. We construct a simple macroeconomic model where agents discount consumption and leisure at different rates. We also consider a standard exponential discounting model and a hyperbolic discounting model, assuming that the same discounting applies to both consumption and leisure. Money is introduced via a cash-in-advance constraint. Although the three models are observationally equivalent, they provide different policy implications. The Friedman rule is optimal in the latter two models, whereas it is not optimal in the first model when agents discount consumption at a higher rate than leisure.

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