The Efficiency of the Friedman Rule in a Monetary Union

This paper evaluates the performance of the Friedman rule and characterizes ecient allocation of resources within a new-generation, search-theoretic model of monetary union with divisibility and degen- erate distribution of money holdings. The main results are: i) the Friedman rule is a necessary and sucient condition for global e- ciency, and ii) the Friedman rule is necessary for local eciency, as it is the unique policy rule that eliminates the hold-up problem in any local market. It is also shown that the ecient quantity demanded by a country-i buyer is increasing, and the country-i price of goods is decreasing, in the country-i fraction of sellers.