Friedman meets hosios: Efficiency in search models of money

Aleksander Berentsen, Guillaume Rocheteau, Shouyong Shi

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

This article studies optimal monetary policy in an economy with endogenous search decisions. We show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades. The Friedman rule eliminates the first inefficiency and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When they cannot be satisfied simultaneously, optimal monetary policy achieves only the second best. We analyse the conditions under which the second-best monetary policy exceeds the Friedman rule.

Original languageEnglish (US)
Pages (from-to)174-195
Number of pages22
JournalEconomic Journal
Volume117
Issue number516
DOIs
StatePublished - Jan 2007

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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