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On the Friedman Rule with Heterogeneous Agents

  • A. Berentsen
  • C. Strub

We consider a general equilibrium model where monetary policy has redistributive effects. Agents have stochastic preferences and face random buying and selling opportunities. We show that the Friedman rule is just the second best policy. However, the Friedman rule is Pareto optimal. It requires to set the gross growth rate of the money supply equal to the discount factor of the most patient agents. Second, we look at the real effects of a money supply shock. In contrast to standard infinitely-lived-representative-agent models, under the Friedman rule a positive shock increases aggregate production and consumption. Interestingly, the shock has no real consequences if monetary policy deviates from the Friedman rule

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 609.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:609
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  1. 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.
  2. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2005. "Heterogeneity, Redistribution, And The Friedman Rule," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 437-454, 05.
  3. 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.
  4. Joe Haslag & Antoine Martin, 2003. "Optimality of the Friedman Rule in Overlapping Generations Model with Spatial Separation," Working Papers 0306, Department of Economics, University of Missouri.
  5. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  6. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "The Distribution of Money Balances and the Non-Neutrality of Money," IEW - Working Papers 220, Institute for Empirical Research in Economics - University of Zurich.
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