Hostname: page-component-586b7cd67f-2plfb Total loading time: 0 Render date: 2024-11-26T12:43:53.887Z Has data issue: false hasContentIssue false
  • English
  • Français

OVERCOMING FINANCIAL FRICTIONS WITH THE FRIEDMAN RULE

Published online by Cambridge University Press:  20 July 2017

Sergio Salas
Sergio Salas*
Affiliation:
Pontifical Catholic University of Valparaiso
*
Address correspondence to: Sergio Salas, Escuela de Economía y Negocios, Pontificia Universidad Católica de Valparaíso, Av. Brasil 2830, Piso 9. Valparaíso, Chile; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

A general equilibrium model with financial frictions in which individuals may encounter unobservable investment opportunities is developed along the lines of Kiyotaki and Moore (2012). I study efficiency properties induced by money and monetary policy when financial frictions prevent optimal equilibrium allocations. By providing closed-form solutions to all prices, allocations, welfare, and, especially, the distribution of individuals with respect to assets, I show that the Friedman rule achieves maximal social welfare, independent of how tight the financial constraints may be. The same level of welfare would be induced by an omniscient central planner able to verify who has an investment opportunity.

Keywords

InsuranceEfficiencyFinancial FrictionsMonetary PolicyAsset MarketsHeterogeneous AgentsFriedman Rule
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 8 , December 2018 , pp. 2141 - 2181
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am grateful for suggestions received on this and earlier drafts of this paper from Fernando Alvarez, Sofia Bauducco, Ricardo Calvicante, Robert Lucas, Edward Nosal, and seminar participants at the Central Bank of Chile and the University of Chicago. I thank the editor and two anonymous referees, whose observations improved the paper substantially. I would especially like to thank Veronica Guerrieri, Kenneth Judd, and Harald Uhlig.

References

REFERENCES

Aiyagari, Rao, Wallace, Neil, and Wright, Randall (1996) Coexistence of money and interest-bearing securities. Journal of Monetary Economics 37 (3), 397–419.Google Scholar
Bernanke, Ben and Gertler, Mark (1989) Agency costs, net worth and business fluctuations. American Economic Review 79 (1), 14–31.Google Scholar
Bernanke, Ben and Gertler, Mark (1999) The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics 1C, 1341–1393.Google Scholar
Bewley, Truman (1983) A difficulty with the optimum quantity of money. Econometrica 51 (5), 1485–1504.Google Scholar
Bigio, Saki (2012) Liquidity Shocks and the Business Cycle: What Next? Working paper, Columbia University. Available at https://www0.gsb.columbia.edu/faculty/sbigio/papers/LiquidityCycles.pdf.Google Scholar
Carlstrom, Charles and Fuerst, Timothy (1997) Agency costs, net worth and business fluctuations: A computable general equilibrium analysis. American Economic Review 87, 893–910.Google Scholar
Christiano, Lawrence and Fisher, Jonas (2000) Algorithms for solving dynamic models with occasionally binding constraints. Journal of Economic Dynamics and Control 24 (8), 1179–1232.Google Scholar
Cooley, Thomas and Hansen, Gary (1989) The inflation tax in a real business cycle model. American Economic Review 79 (4), 733–748.Google Scholar
Curdia, Vasco and Woodford, Michael (2009) Credit Frictions and Optimal Monetary Policy. Working paper no. 146, National Bank of Belgium.Google Scholar
Del Negro, Marco, Eggertsson, Gauti, Ferrero, Andrea, and Kiyotaki, Nobuhiro (2011) The Great Escape? A Quantitative Evaluation of the Fed's Non-Standard Policies. Staff report no. 520, Federal Reserve Bank of New York and Princeton University.Google Scholar
Diamond, Douglas and Dybvig, Philip (1983) Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419.Google Scholar
Fiore, Fiorela De and Tristani, Oreste (2008) Credit and the Natural Rate of Interest. Working paper no. 889, European Central Bank. Available at https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp889.pdf?bfb1c0b60beeaacfeedf6c7b9b9e5414.Google Scholar
Friedman, Milton (1969) The Optimum Quantity of Money. Chicago: Aldine.Google Scholar
Greenwood, Jeremy, Hercowitz, Zvi, and Huffman, Gregory (1988) Investment, capacity utilization, and the real business cycle. American Economic Review 78 (3), 402–417.Google Scholar
Hiraguchi, Ryoji (2010) Wealth inequality and optimal monetary policy. Macroeconomic Dynamics 14 (05), 629–644.Google Scholar
Kiyotaki, Nobuhiro and Moore, John (2012) Liquidity, Business Cycles, and Monetary Policy. Working paper, Princeton University. Available at https://www.princeton.edu/~kiyotaki/papers/km6-120215.pdf.Google Scholar
Kiyotaki, Nobuhiro and Moore, Roger (2005) Liquidity and asset prices. International Economic Review 46 (2), 317–349.Google Scholar
Kocherlakota, Narayana (2005) Optimal monetary policy: What we know and what we don't know. International Economic Review 46 (2), 715–729.Google Scholar
Lucas, Robert (1980) Equilibrium in a pure currency economy. Economic Inquiry 18 (2), 203–220.Google Scholar
Lucas, Robert (1990) Liquidity and interest rates. Journal of Economic Theory 50, 237–264.Google Scholar
Manuelli, Rodolfo and Sargent, Thomas (2010) Alternative monetary policies in a turnpike economy. Macroeconomic Dynamics 14 (05), 727–762.Google Scholar
Mills, David (2007) A model in which outside and inside money are essential. Macroeconomic Dynamics 11 (3), 347–366.Google Scholar
Nosal, Ed and Rocheteau, Guillaume (2013) Pairwise trade, asset prices and monetary policy. Journal of Economic Dynamics and Control 37, 1–17.Google Scholar
Salas, Sergio (2013) Credit frictions and unexpected credit crunches. Journal of Macroeconomics 37, 161–181.Google Scholar
Samuelson, Paul (1969) Lifetime portfolio selection by dynamic stochastic programming. The Review of Economics and Statistics 51 (3), 239–246.Google Scholar
Shi, Shouyong (2015) Liquidity, assets and business cycles. Journal of Monetary Economics 70, 116–132.Google Scholar
Sidrawski, Miguel (1967) Rational choice and patterns of growth in a monetary economy. American Economic Review 57 (2), 534–544.Google Scholar
Taub, Bart (1988) Efficiency in a pure currency economy with inflation. Economic Inquiry 26 (4), 567–583.Google Scholar
Taub, Bart (1994) Currency and credit are equivalent mechanisms. International Economic Review 35 (4), 921–956.Google Scholar
Taub, Bart (1995) Money as a growth-enhancing mechanism. Journal of International Trade & Economic Development 4 (3), 385–407.Google Scholar
Telyukova, Irina and Visschers, Ludo (2013) Precautionary money demand in a business-cycle model. Journal of Monetary Economics 60, 900–916.Google Scholar
Telyukova, Irina and Wright, Randall (2008) A model of money and credit, with application to the credit card debt puzzle. Review of Economic Studies 75 (2), 629–647.Google Scholar
Waller, Christopher (2011) Random matching and money in the neoclassical growth model: Some analytical results. Macroeconomic Dynamics 15 (Supplement S2), 293–312.Google Scholar
Wen, Yi (2015) Money, liquidity and welfare. European Economic Review 76, 1–24.Google Scholar