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Costly intermediation and the Friedman rule

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  • Benjamin Eden

    ()
    (Department of Economics, Vanderbilt University)

Abstract

I examine the implementation of the Friedman rule under the assumption that age dependent lump sum transfers are possible and private intermediation is costly. This is done both in an infinitely lived agents model and in an overlapping generations model. I argue that in addition to a zero nominal-interest-rate policy (the so called Friedman rule) a transfer to young agents, or a government loan program is required for satiating agents with real balances. The paper also contributes to the understanding of Friedman's original article and discusses related questions about the size of the financial sector. It is shown that the adoption of the (modified) Friedman rule will crowd out private lending and borrowing. I also look at the social value of a market for contingent claims and argue that resources spent on operating a market for accidental nominal bequests are a waste from the social point of view in spite of the fact that individuals have an incentive to trade in such markets.

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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 12-00003.

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Date of creation: 04 Feb 2012
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Handle: RePEc:van:wpaper:vuecon-12-00003

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

Keywords: The Friedman Rule; Accidental bequests; The optimal size of the financial sector; Government loans;

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References

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  1. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  2. Rajnish Mehra & Facundo Piguillem & Edward C. Prescott, 2011. "Costly financial intermediation in neoclassical growth theory," Working Papers 685, Federal Reserve Bank of Minneapolis.
  3. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
  4. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine, 2004. "Heterogeneity, Redistribution, and the Friedman Rule," Staff General Research Papers 11371, Iowa State University, Department of Economics.
  5. Correia, Isabel & Teles, Pedro, 1996. "Is the Friedman rule optimal when money is an intermediate good?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 223-244, October.
  6. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Timing and real indeterminacy in monetary models," Working Paper 9910R, Federal Reserve Bank of Cleveland.
  7. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  8. Carlos E. da Costa & Iván Werning, 2008. "On the Optimality of the Friedman Rule with Heterogeneous Agents and Nonlinear Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 82-112, 02.
  9. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-75, August.
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Cited by:
  1. Benjamin Eden, 2014. "The optimal supply of liquidity and the regulations of money substitutes: a Baumol-Tobin approach," Vanderbilt University Department of Economics Working Papers 14-00001, Vanderbilt University Department of Economics.

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