Essential interest-bearing money

In the quasi-linear model of Lagos and Wright [A unified framework for monetary theory and policy analysis, J. Polit. Econ. 113 (2005) 463—484], money is essential and—if lump-sum taxation is feasible—the Friedman rule implements the first-best allocation. In this paper, I impose the additional restriction of voluntary trade; so that (coercive) lump-sum taxation is infeasible. Despite this added restriction, I find that the first-best remains implementable under an incentive-feasible Friedman rule. Incentive-feasibility necessarily entails a strictly positive nominal interest rate; which allows for individually-rational (voluntary) lump-sum taxation.