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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.

Suggested Citation

  • Aleksander Berentsen & Guillaume Rocheteau, "undated". "On the Friedman Rule in Search Models with Divisible Money," IEW - Working Papers 155, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:155
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    References listed on IDEAS

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    16. Stephen Meier & Bruno Frey, 2004. "Do Business Students Make Good Citizens?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 11(2), pages 141-163.
    17. Bruno S. Frey & Alois Stutzer, "undated". "Testing Theories of Happiness," IEW - Working Papers 147, Institute for Empirical Research in Economics - University of Zurich.
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    Cited by:

    1. Pedro Gomis‐Porqueras & Daniel Sanches, 2013. "Optimal Monetary Policy in a Model of Money and Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 701-730, June.
    2. Bruno S. Frey & Alois Stutzer, "undated". "Direct Democracy: Designing a Living Constitution," IEW - Working Papers 167, Institute for Empirical Research in Economics - University of Zurich.
    3. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2007. "Calculating Tragedy: Assessing The Costs Of Terrorism," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 1-24, February.
    4. Enrico De Giorgi & Stefan Reimann, "undated". "The ?-Beauty Contest: Choosing Numbers, Thinking Intervals," IEW - Working Papers 183, Institute for Empirical Research in Economics - University of Zurich.
    5. Aleksander Berentsen & Guillaume Rocheteau, 2002. "Money in Bilateral Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 489-506, December.
    6. Guillaume Rocheteau & Tai-Wei Hu & Lucie Lebeau & Younghwan In, 2021. "Gradual Bargaining in Decentralized Asset Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 72-109, October.
    7. Bruno Frey, 2005. "‘‘Just forget it.’’ Memory distortions as bounded rationality," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 4(1), pages 13-25, June.
    8. Dror Goldberg, 2006. "Divisible money with partially directed search," 2006 Meeting Papers 618, Society for Economic Dynamics.
    9. Guillaume Rocheteau & Lucie Lebeau & Tai-Wei Hu & Younghwan In, 2018. "Gradual Bargaining in Decentralized Asset Markets," Working Papers 181904, University of California-Irvine, Department of Economics.
    10. 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.
    11. Berentsen, Aleksander, 2006. "On the private provision of fiat currency," European Economic Review, Elsevier, vol. 50(7), pages 1683-1698, October.
    12. 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.
    13. Lebeau, Lucie, 2020. "Credit frictions and participation in over-the-counter markets," Journal of Economic Theory, Elsevier, vol. 189(C).

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    Keywords

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    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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