On the Friedman Rule in Search Models with Divisible Money

Aleksander Berentsen and Guillaume Rocheteau

No 155, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

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: D83 E00 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: On the Friedman Rule in Search Models with Divisible Money (2003)
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