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Optimality of the Friedman rule under ambiguity

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  • Eisei Ohtaki

Abstract

This article reexamines optimality of the Friedman rule in an economy, wherein (i) spatial separation and limited communication create a transactions role for money (ii) banks arise to provide liquidity, and (iii) agents are nonsmooth ambiguity aversion. It is shown that the structure of the set of "second-best" monetary policies crucially depends on the relation between the set of beliefs and the marginal productivity of capital. Especially, in order for the Friedman rule to be suboptimal, it is necessary for the maximum of subjective probabilities of realizing liquidity events to be sufficiently small.

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  • Eisei Ohtaki, 2016. "Optimality of the Friedman rule under ambiguity," Working Papers e103, Tokyo Center for Economic Research.
    • Handle: RePEc:tcr:wpaper:e103
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