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On the Friedman Rule with Heterogeneous Agents

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Author Info
A. Berentsen
C. Strub

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Abstract

We consider a general equilibrium model where monetary policy has redistributive effects. Agents have stochastic preferences and face random buying and selling opportunities. We show that the Friedman rule is just the second best policy. However, the Friedman rule is Pareto optimal. It requires to set the gross growth rate of the money supply equal to the discount factor of the most patient agents. Second, we look at the real effects of a money supply shock. In contrast to standard infinitely-lived-representative-agent models, under the Friedman rule a positive shock increases aggregate production and consumption. Interestingly, the shock has no real consequences if monetary policy deviates from the Friedman rule

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Publisher Info
Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 609.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:609

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Related research
Keywords: Friedman rule; heterogeneity; monetary policy;

Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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  1. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, 05. [Downloadable!] (restricted)
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  2. Joe Haslag & Antoine Martin, 2003. "Optimality of the Friedman Rule in Overlapping Generations Model with Spatial Separation," Working Papers 0306, Department of Economics, University of Missouri. [Downloadable!]
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  3. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland. [Downloadable!]
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  4. S. Boragan Aruoba & Christopher J. Waller, 2005. "Money and Capital," 2005 Meeting Papers 550, Society for Economic Dynamics. [Downloadable!]
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    • S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland. [Downloadable!]
  5. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2004. "Heterogeneity, Redistribution, and the Friedman Rule," Staff General Research Papers 11371, Iowa State University, Department of Economics.
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  6. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
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