Report
Optimality of the Friedman rule in an overlapping generations model with spatial separation
Abstract: We examine models with spatial separation and limited communication that have shown some promise toward resolving the disparity between theory and practice concerning optimal monetary policy; these models suggest that the Friedman rule may not be optimal. We show that intergenerational transfers play a key role in this result, the Friedman rule is a necessary condition for an efficient allocation in equilibrium, and the Friedman rule is chosen whenever agents can implement mutually beneficial arrangements. We conclude that in order for these models to resolve the aforementioned disparity, they must answer the following question: Where do the frictions that prevent agents from implementing mutually beneficial arrangements come from?
Keywords: overlapping generations; Friedman rule; spatial separation;
JEL Classification: E52; E58; H21;
Access Documents
File(s): File format is text/html https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr225.html
File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr225.pdf
Authors
Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2005-10-01
Number: 225
Pages: 32 pages
Note: For a published version of this report, see Joseph H. Haslag and Antoine Martin, "Optimality of the Friedman Rule in an Overlapping Generations Model with Spatial Separation," Journal of Money, Credit, and Banking 39, no. 7 (October 2007): 1741-58.