Gaps and Triangles
Banco de Portugal; Banco de Portugal, Universidade Catolica Portuguesa and CEPR; Federal Reserve Bank of Chicago, CEPR
Real business cycles model without capital with monopolistic competition, cash-in-advance constraint on household transactions, and prices set one period in advance (sticky prices). Government finances exogenous expenditures with lump-sum taxes
monopolistic competition with prices set one period in advance; constant elasticity of substitution between goods
Friedman rule optimal under sticky prices - nominal interest rate set to zero implies zero inflation or deflation at rate of time preference
Main theoretical result of paper: Proposition 2 states optimal interest rate policy is Friedman rule (Rt=1)