On the Friedman Rule in Search Models with Divisible Money

Aleksander Berentsen () and Guillaume Rocheteau ()

No iewwp155, IEW - Working Papers from Institute for Empirical Research in Economics - IEW

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.

Keywords: Money; Search; Friedman rule (search for similar items in EconPapers)
JEL-codes: E00 D83 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: On the Friedman Rule in Search Models with Divisible Money (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:zur:iewwpx:155

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