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OPTIMAL STABILIZATION POLICY WITH SEARCH EXTERNALITIES

Published online by Cambridge University Press:  11 November 2013

Aleksander Berentsen  and
Christopher Waller
Aleksander Berentsen*
Affiliation:
University of Basel and Federal Reserve Bank of St. Louis
Christopher Waller
Affiliation:
Federal Reserve Bank of St. Louis and University of Notre Dame
*
Address correspondence to: Aleksander Berentsen, Economics Department, University of Basel, Peter-Merian-Weg 6, Postfach, CH-4002 Basel, Switzerland; e-mail: [email protected].
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Abstract

We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates “congestion,” which causes aggregate output to be inefficient. Because of the informational frictions that give rise to money, households are unable to insure themselves perfectly against aggregate shocks. This gives rise to a welfare-improving role for monetary policy that works by adjusting the nominal interest rate in response to these shocks. Optimal policy is determined by choosing a set of state-contingent nominal interest rates to maximize the expected lifetime utility of the agents subject to the constraints of being an equilibrium.

Keywords

Monetary PolicyOptimal Stabilization PolicySearch EquilibriumMicrofoundation of Money
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 3 , April 2015 , pp. 669 - 700
Copyright
Copyright © Cambridge University Press 2013 

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