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A Note on the implementation of the Pareto efficient allocation in the Lagos-Wright model

  • Tao Peng


    (Southwestern University of Finance and Economics)

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This note modifies Lagos – Wright (2005) by adding subsidies to sellers. We show that this modification can result in a Pareto efficient allocation at the Friedman rule when buyers do not have all the bargaining power. We find that the optimal rate of subsidy is increasing in buyers' relative risk aversion coefficient.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 32 (2012)
Issue (Month): 1 ()
Pages: 27-36

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Handle: RePEc:ebl:ecbull:eb-10-00532
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  1. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
  2. Schmitt-Grohé, Stephanie & Uribe, Martín, 2010. "The Optimal Rate of Inflation," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 13, pages 653-722 Elsevier.
  3. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  4. Pedro Gomis-Porqueras & Adrian Peralta-Alva, 2008. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," Working Papers 2008-015, Federal Reserve Bank of St. Louis.
  5. Aruoba, S. Boragan & Chugh, Sanjay K., 2010. "Optimal fiscal and monetary policy when money is essential," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1618-1647, September.
  6. 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.
  7. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal fiscal and monetary policy: equivalence results," Staff Report 403, Federal Reserve Bank of Minneapolis.
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