On the Friedman Rule in Search Models with Divisible Money

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On the Friedman Rule in Search Models with Divisible Money

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Aleksander Berentsen
Guillaume Rocheteau

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Abstract

This paper studies the validity of the Friedman rule in a search model with divisible money and divisible goods where the terms of trades are determined endogenously. We show that ex post bargaining generates a holdup problem similar to the one emphasized in the labour-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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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp155.

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Handle: RePEc:zur:iewwpx:155

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Related research
Keywords: Money; Search; Friedman rule;

Other versions of this item:

Article
- Aleksander Berentsen & Guillaume Rocheteau, 2003. "On the Friedman Rule in Search Models with Divisible Money," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]

Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-DGE-2003-07-04 (Dynamic General Equilibrium)
NEP-MAC-2003-07-04 (Macroeconomics)

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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.)

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 & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland. [Downloadable!]
- Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
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. [Downloadable!]

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