Optimality of the Friedman rule under ambiguity

Eisei Ohtaki

No e103, Working Papers from Tokyo Center for Economic Research

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.

Pages: 41 pages
Date: 2016-01
New Economics Papers: this item is included in nep-mon and nep-upt
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