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Friedman Meets Hosios: Efficiency in Search Models of Money Author info | Abstract | Publisher info | Download info | Related research | Statistics Aleksander Berentsen
Guillaume Rocheteau
Shouyong Shi
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In this paper we study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. We show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. We analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, we extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities.
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number
shouyong-02-04.
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Length: 34 pages
Date of creation: 11 Jul 2002Date of revision:
Handle: RePEc:tor:tecipa:shouyong-02-04Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario Phone: (416) 978-5283 Fax: (416) 978-6713
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Keywords: Money ; Search ; Friedman rule ; Hosios rule. ; Other versions of this item:
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Berentsen, Aleksander & Rocheteau, Guillaume, 2002.
"On the efficiency of monetary exchange: how divisibility of money matters ,"
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PIER Working Paper Archive
03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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Other versions:
Guillaume Rocheteau & Randall Wright, 2004.
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Working Paper
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[Downloadable!] Randall Wright & Guillame Rocheteau, 2003.
"Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium ,"
Levine's Bibliography
666156000000000302, UCLA Department of Economics.
[Downloadable!] Guillaume Rocheteau & Randall Wright, 2005.
"Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium ,"
Econometrica ,
Econometric Society, vol. 73(1), pages 175-202, 01.
[Downloadable!] (restricted)
Full
references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
Ritter, Moritz, 2007.
"The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money ,"
MPRA Paper
1973, University Library of Munich, Germany.
[Downloadable!]
Ricardo Lagos & Randall Wright, 2004.
"A unified framework for monetary theory and policy analysis ,"
Staff Report
346, Federal Reserve Bank of Minneapolis.
[Downloadable!]
Other versions: Ricardo Lagos & Guillaume Rocheteau, 2004.
"Inflation, output, and welfare ,"
Working Paper
0407, Federal Reserve Bank of Cleveland.
[Downloadable!]
Other versions:
Ricardo Lagos & Guillaume Rocheteau, 2004.
"Inflation, output and welfare ,"
Staff Report
342, Federal Reserve Bank of Minneapolis.
[Downloadable!] Ricardo Lagos & Guillaume Rocheteau, 2005.
"Inflation, Output, And Welfare ,"
International Economic Review ,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, 05.
[Downloadable!] (restricted) Guillaume Rocheteau & Randall Wright, 2003.
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PIER Working Paper Archive
03-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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Shouyong Shi, 2006.
"A Microfoundation of Monetary Economics ,"
Working Papers
tecipa-211, University of Toronto, Department of Economics.
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Aleksander Berentsen & Christopher J. Waller, 2009.
"Optimal stabilization policy with endogenous firm entry ,"
Working Papers
2009-032, Federal Reserve Bank of St. Louis.
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Marchesiani, Alessandro & Senesi, Pietro, 2007.
"Money and Nominal Bonds ,"
MPRA Paper
9417, University Library of Munich, Germany.
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Other versions: Etienne, LEHMANN & Bruno, VAN DER LINDEN, 2007.
"Search Frictions on Product and Labor markets : Money in the Matching Function ,"
Discussion Papers (ECON - Département des Sciences Economiques)
2007013, Université catholique de Louvain, Département des Sciences Economiques.
[Downloadable!]
Other versions: repec:bep:maccon:v:3:y:2003:i:1:p:1121-1121 is not listed on IDEAS
Ben Craig & Guillaume Rocheteau, 2006.
"Inflation and welfare: a search approach ,"
Policy Discussion Papers ,
Federal Reserve Bank of Cleveland, issue Jan.
[Downloadable!]
Other versions: 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:
Guillaume Rocheteau & Randall Wright, 2004.
"Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium ,"
Working Paper
0405, Federal Reserve Bank of Cleveland.
[Downloadable!] Randall Wright & Guillame Rocheteau, 2003.
"Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium ,"
Levine's Bibliography
666156000000000302, UCLA Department of Economics.
[Downloadable!] Guillaume Rocheteau & Randall Wright, 2005.
"Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium ,"
Econometrica ,
Econometric Society, vol. 73(1), pages 175-202, 01.
[Downloadable!] (restricted) S. Boragan Aruoba & Randall Wright, 2002.
"Search, Money and Capital: A Neoclassical Dichotomy, Second Version ,"
PIER Working Paper Archive
03-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2003.
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Brian Peterson & Shouyong Shi, 2006.
"Money, Price Dispersion and Welfare ,"
Working Papers
tecipa-191, University of Toronto, Department of Economics.
[Downloadable!]
Other versions: Guillaume Rocheteau & Christopher Waller, 2005.
"Bargaining and the value of money ,"
Working Paper
0501, Federal Reserve Bank of Cleveland.
[Downloadable!]
Other versions: Aleksander Berentsen & Christopher J. Waller, 2009.
"Price level targeting and stabilization policy ,"
Working Papers
2009-033, Federal Reserve Bank of St. Louis.
[Downloadable!]
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.
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Aleksander Berentsen & Christopher Waller, 2005.
"Optimal Stabilization Policy with Flexible Prices ,"
CESifo Working Paper Series
CESifo Working Paper No. , CESifo Group Munich.
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Etienne Lehmann, 2006.
"A Search Model of Unemployment and Inflation ,"
IZA Discussion Papers
2194, Institute for the Study of Labor (IZA).
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Other versions: Shouyong Shi, 2008.
"Efficiency Improvement from Restricting the Liquidity of Nominal Bonds ,"
Working Papers
tecipa-329, University of Toronto, Department of Economics.
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Other versions:
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