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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].
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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 

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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

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