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Working Paper
On the Essentiality of Credit and Banking at the Friedman Rule
We investigate the essentiality of credit and banking in a microfounded monetary model in which agents face heterogeneous idiosyncratic time preference shocks. Three main results arise from our analysis. First, the constrained-efficient allocation is unattainable without banks. Second, financial intermediation can improve the equilibrium allocation even at the Friedman rule because it relaxes the liquidity constraints of impatient borrowers. Third, changes in credit conditions are not necessarily neutral in a monetary equilibrium at the Friedman rule. If the debt limit is sufficiently low, ...
Report
Optimality of the Friedman rule in an overlapping generations model with spatial separation
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, ...
Speech
Ample reserves and the Friedman rule
Dallas Fed President Lorie Logan delivered these remarks before the European Central Bank Conference on Money Markets 2023 in Frankfurt, Germany.
Working Paper
Aggregate Liquidity Management
It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies with private credit instruments. In our framework, both money and credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy affects the liquidity premium on private credit ...
Working Paper
Welfare-enhancing inflation and liquidity premia
The Friedman rule recommends eliminating liquidity premia on nominally risk-free government debt and following a deflationary monetary policy. The desirability of this prescription in a broad class of monetary models contrasts sharply with observation. In reality, the average rate of inflation is almost always positive and long-dated government securities are–as a matter of policy–allowed to trade at a discount relative to cash, even when these securities represent risk-free claims to cash. Our paper identifies a set of empirically-plausible conditions under which a strictly positive ...