On the optimality of the Friedman Rule in a New Monetarist Model

Ryoji Hiraguchi and Keiichiro Kobayashi

No 13-005E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: We study a monetary model in which buyers choose search intensity and prices are considered as given in the decentralized market. In doing so, we indicate that the Friedman rule may not be optimal. Buyers' search intensity is excessively low under the rule, because their surplus is less than the social surplus under the price-taking regime. A deviation from the rule increases buyers' surplus and search intensity, and thus raises welfare and output. Our result differs from Lagos and Rocheteau (International Economic Review 2005) in which the pricing mechanism is either bargaining or price-posting and the Friedman rule is optimal.

Pages: 17
Date: 2013-11
New Economics Papers: this item is included in nep-dge and nep-mon
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Journal Article: On the optimality of the Friedman rule in a New Monetarist model (2014)
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