A BEJM Contributions article.

Abstract

This paper studies the validity of the Friedman rule in a search model with divisible money and divisible goods in which the terms of trades are determined endogenously. We show that ex post bargaining generates a holdup problem similar to the one emphasized in the labor-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.

Submitted: April 14, 2003 · Accepted: September 10, 2003 · Published: December 12, 2003

Originally published in Contributions to Macroeconomics.

Recommended Citation

Berentsen, Aleksander and Rocheteau, Guillaume (2003) "On the Friedman Rule in Search Models with Divisible Money," Contributions to Macroeconomics: Vol. 3 : Iss. 1, Article 11.
Available at: http://www.bepress.com/bejm/contributions/vol3/iss1/art11