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Optimality of the Friedman Rule in Overlapping Generations Model with Spatial Separation

Joseph Haslag () and Antoine Martin ()

No 306, Working Papers from Department of Economics, University of Missouri

Abstract: Recent papers suggest that when intermediation is analyzed seriously, the Friedman rule does not maximize social welfare in overlapping generations model in which money is valued because of spatial separation and limited communication. These papers emphasize a trade-off between productive efficiency and risk sharing. We show financial intermediation or a trade-off between productive efficiency and risk sharing are neither necessary nor sufficient for that result. We give conditions under which the Friedman rule maximizes social welfare and show any feasible allocation such that money grows faster than the Friedman rule is Pareto dominated by a feasible allocation with the Friedman rule. The key to the results is the ability to make intergenerational transfers.

Keywords: monetary policy; Friedman rule; fiat money (search for similar items in EconPapers)
JEL-codes: E31 E51 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ure
Date: 2003-06-11
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