The dilemma of Rationality or Providing Efficiency in Monetary Policy Making: An Application of Arrow’s

Financial frictions inducted in the model is a new contribution to monetary economics. Herein, an analytical tool arranges monetary policymaking in the form of two steps procedure. In the first step, an appropriate amount of money supply should be assessed; and in the second step, that appropriate amount should be allocated to several sectors. The Central Bank obligates the step of assessment and entrusts to the Board of Professional Banks the allocating step; this way provides more efficiency since the professional banks in comparison to the central bank have more and better information about economic sectors. According to Arrow's theorem, in allocating, rationality arises because collective decision-making happens in this step. The mathematical proposition about this policymaking narrates the dilemma of policymaking: two-step monetary policymaking makes better efficiency but worse rationality. The results show that Arrow's theorem contributions prove that the proposition is correct and this paper presents three approaches to get out from this dilemma of policymaking.