Financial market participation, financial intermediation, and monetary policy

► The Friedman Rule (FR) is often found to be optimal in monetary models. ► However at the FR, banks are found to play no role. ► I show that economies of scale (ES) in banking are important for this result. ► The welfare gains from disinflation are much higher under banking if ES are high. ► Banks can still play an important role in resource allocation at the Friedman rule.