Money, liquidity, and the structure of production
University of Mississippi; Texas Tech University
Lagos-Wright monetary search model with competing media of exchange (money and bonds), endogenous period of production (time-to-build), and endogenous firm entry/exit with idiosyncratic productivity shocks following geometric Brownian motion
firms choose optimal duration of production (period of production), face idiosyncratic productivity shocks, entry and exit decisions with fixed costs
Section 4.2 p.322
Friedman Rule optimal: π = -ρ where ρ is the pure rate of time preference; eliminates opportunity cost of holding money and ensures real interest rate equals rate of time preference
Authors derive Friedman Rule as optimal policy in both centralized and decentralized markets; main theoretical result of the paper