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On the Friedman Rule in Search Models with Divisible Money

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  • Aleksander Berentsen
  • Guillaume Rocheteau

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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Bibliographic Info

Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 155.

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Handle: RePEc:zur:iewwpx:155

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Keywords: Money; Search; Friedman rule;

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References

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  1. 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.
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  15. Stutzer, Alois & Frey, Bruno S., 2005. "Does Marriage Make People Happy, Or Do Happy People Get Married?," IZA Discussion Papers 1811, Institute for the Study of Labor (IZA).
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Citations

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Cited by:
  1. Aleksander Berentsen & Guillaume Rocheteau, 2002. "Money in Bilateral Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 489-506, December.
  2. 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.
  3. Bruno S. Frey & Alois Stutzer, 2003. "Direct Democracy: Designing a Living Constitution," CREMA Working Paper Series, Center for Research in Economics, Management and the Arts (CREMA) 2003-05, Center for Research in Economics, Management and the Arts (CREMA).
  4. Dror Goldberg, 2006. "Divisible money with partially directed search," 2006 Meeting Papers, Society for Economic Dynamics 618, Society for Economic Dynamics.
  5. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CREMA Working Paper Series, Center for Research in Economics, Management and the Arts (CREMA) 2004-23, Center for Research in Economics, Management and the Arts (CREMA).
  6. Berentsen, Aleksander, 2006. "On the private provision of fiat currency," European Economic Review, Elsevier, Elsevier, vol. 50(7), pages 1683-1698, October.
  7. Enrico De Giorgi & Stefan Reimann, . "The ?-Beauty Contest: Choosing Numbers, Thinking Intervals," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 183, Institute for Empirical Research in Economics - University of Zurich.
  8. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report, Federal Reserve Bank of Minneapolis 346, Federal Reserve Bank of Minneapolis.

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