Optimal policy in an economy with human capital where money is essential

Minhyeon Jeong

Economics Letters, 2015, vol. 136, issue C, 103-107

Abstract: This paper investigates optimal policies in an economy with human capital where money is essential in trades of consumption goods. To this end, we extend the Lagos and Wright (2005) economy to incorporate human capital accumulation. (i) Since human capital accumulation is distorted by search friction as well as bargaining friction, monetary policy alone cannot achieve the first-best allocation. In our preferred setting, (ii) subsidies to human capital investment are required for the first-best optimum. (iii) The Friedman rule is still optimal.

Keywords: Human capital; Optimal policy; The Friedman rule (search for similar items in EconPapers)
JEL-codes: E50 E52 E62 J24 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:136:y:2015:i:c:p:103-107

DOI: 10.1016/j.econlet.2015.09.016

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