Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/60704 
Year of Publication: 
2005
Series/Report no.: 
Staff Report No. 225
Publisher: 
Federal Reserve Bank of New York, New York, NY
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?
Subjects: 
Friedman rule, overlapping generations, spatial separation
JEL: 
E52
E58
H21
Document Type: 
Working Paper

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