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On the Friedman Rule in Search Models with Divisible Money

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  • Berentsen Aleksander

    ()
    (University of Basel)

  • Rocheteau Guillaume

    ()
    (Australian National University)

Abstract

This paper studies the validity of the Friedman rule in a search model with divisible money and divisible goods in which the terms of trades are determined endogenously. We show that ex post bargaining generates a holdup problem similar to the one emphasized in the labor-market literature. Buyers cannot obtain the full return that an additional unit of money provides to the match, which makes the purchasing power of money inefficiently low in equilibrium. Consequently, even though the Friedman rule maximizes the purchasing power of money, it fails to generate the first-best allocation of resources unless buyers have all the bargaining power.

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File URL: http://www.degruyter.com/view/j/bejm.2003.3.1/bejm.2003.3.1.1121/bejm.2003.3.1.1121.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 3 (2003)
Issue (Month): 1 (December)
Pages: 1-21

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Handle: RePEc:bpj:bejmac:v:contributions.3:y:2003:i:1:n:11

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  1. E. Fehr & John A. List, . "The Hidden Costs and Returns of Incentives - Trust and Trustworthiness among CEOs," IEW - Working Papers 134, Institute for Empirical Research in Economics - University of Zurich.
  2. Fehr, Ernst & Fischbacher, Urs & Schupp, Jürgen & von Rosenbladt, Bernhard & Wagner, Gert Georg, 2003. "A Nationwide Laboratory Examining Trust and Trustworthiness by Integrating Behavioural Experiments into Representative Surveys," CEPR Discussion Papers 3858, C.E.P.R. Discussion Papers.
  3. Lars P. Feld & Bruno S. Frey, 2000. "Trust Breeds Trust: How Taxpayers are Treated," CESifo Working Paper Series 322, CESifo Group Munich.
  4. Lalive, Rafael & van Ours, Jan C & Zweimüller, Josef, 2002. "The Effect of Benefit Sanctions on the Duration of Unemployment," CEPR Discussion Papers 3311, C.E.P.R. Discussion Papers.
  5. Oechslin, Manuel & Reto Foellmi, 2003. "Who Gains from Non-Collusive Corruption?," Royal Economic Society Annual Conference 2003 159, Royal Economic Society.
  6. Ralf Becker & Urs Fischbacher & Thorsten Hens, . "Soft Landing of a Stock Market Bubble, An Experimental Study," IEW - Working Papers 090, Institute for Empirical Research in Economics - University of Zurich.
  7. Alois Stutzer & Bruno S. Frey, . "Does Marriage Make People Happy, Or Do Happy People Get Married?," IEW - Working Papers 143, Institute for Empirical Research in Economics - University of Zurich.
  8. Rabah Amir & Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2002. "Market Selection and Survival of Investment Strategies," Discussion Papers 02-16, University of Copenhagen. Department of Economics.
  9. Urs Fischbacher & Christina M. Fong & Ernst Fehr, . "Fairness, Errors and the Power of Competition," IEW - Working Papers 133, Institute for Empirical Research in Economics - University of Zurich.
  10. Alois Stutzer & Bruno S. Frey, . "Stress That Doesn't Pay: The Commuting Paradox," IEW - Working Papers 151, Institute for Empirical Research in Economics - University of Zurich.
  11. Bruno Frey & Stephan Meier, 2005. "Selfish and Indoctrinated Economists?," European Journal of Law and Economics, Springer, vol. 19(2), pages 165-171, April.
  12. Stephan Meier & Bruno S. Frey, . "Do Business Students make Good Citizens?," IEW - Working Papers 148, Institute for Empirical Research in Economics - University of Zurich.
  13. Ernst Fehr & Urs Fischbacher & Bernhard von Rosenbladt & Jürgen Schupp & Gert G. Wagner, 2003. "A Nation-Wide Laboratory. Examining Trust and Trustworthiness by Integrating Behavioral Experiments into Representative Survey," CESifo Working Paper Series 866, CESifo Group Munich.
  14. Bruno S. Frey & Stephan Meier, . "The Economics of Museums," IEW - Working Papers 149, Institute for Empirical Research in Economics - University of Zurich.
  15. Bruno S. Frey & Alois Stutzer, . "Testing Theories of Happiness," IEW - Working Papers 147, Institute for Empirical Research in Economics - University of Zurich.
  16. Reto Foellmi & Josef Zweimueller, . "Inequality, Market Power, and Product Diversity," IEW - Working Papers 145, Institute for Empirical Research in Economics - University of Zurich.
  17. Bruno S. Frey & Simon Luechinger, . "Terrorism: Deterrence May Backfire," IEW - Working Papers 136, Institute for Empirical Research in Economics - University of Zurich.
  18. Bruno S. Frey & Stephan Meier, . "Pro-Social Behavior, Reciprocity or Both?," IEW - Working Papers 107, Institute for Empirical Research in Economics - University of Zurich.
  19. Alois Stutzer, . "The Role of Income Aspirations in Individual Happiness," IEW - Working Papers 124, Institute for Empirical Research in Economics - University of Zurich.
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Citations

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Cited by:
  1. Enrico De Giorgi & Stefan Reimann, . "The ?-Beauty Contest: Choosing Numbers, Thinking Intervals," IEW - Working Papers 183, Institute for Empirical Research in Economics - University of Zurich.
  2. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CREMA Working Paper Series 2004-23, Center for Research in Economics, Management and the Arts (CREMA).
  3. Bruno S. Frey & Alois Stutzer, . "Direct Democracy: Designing a Living Constitution," IEW - Working Papers 167, Institute for Empirical Research in Economics - University of Zurich.
  4. Aleksander Berentsen & Guillaume Rocheteau, 2002. "Money in Bilateral Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 489-506, December.
  5. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  6. Dror Goldberg, 2006. "Divisible money with partially directed search," 2006 Meeting Papers 618, Society for Economic Dynamics.
  7. Guillaume Rocheteau & Randall Wright, 2003. "Inflation and Welfare in Models with Trading Frictions," PIER Working Paper Archive 03-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  8. Berentsen, Aleksander, 2006. "On the private provision of fiat currency," European Economic Review, Elsevier, vol. 50(7), pages 1683-1698, October.

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