Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-24T00:34:52.006Z Has data issue: false hasContentIssue false
  • English
  • Français

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].
Get access Rights & Permissions [Opens in a new window]

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 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Aruoba, S.B. and Chugh, S.K. (2010) Optimal fiscal and monetary policy when money is essential. Journal of Economic Theory 145, 1618–1647.Google Scholar
Aruoba, S.B., Rocheteau, G., and Waller, C. (2007) Bargaining and the value of money. Journal of Monetary Economics 54, 2636–2655.Google Scholar
Barlevy, G. (2005) The cost of business cycles and the benefits of stabilization. Economic Perspectives, Federal Reserve Bank of Chicago 29, 32–49.Google Scholar
Berentsen, A., Camera, G., and Waller, C. (2007) Money, credit and banking. Journal of Economic Theory 135, 171–195.Google Scholar
Berentsen, A., Rocheteau, G., and Shi, S. (2007) Friedman meets Hosios: Efficiency in search models of money. Economic Journal 117, 174–195.Google Scholar
Berentsen, A. and Waller, C. (2011) Price level targeting and optimal stabilization. Journal of Money, Credit and Banking 43 (7), 559–580.Google Scholar
Bergin, P. and Corsetti, G. (2008) The extensive margin and monetary policy. Journal of Monetary Economics 55, 1222–1237.Google Scholar
Bilbiie, F., Ghironi, F., and Melitz, M. (2007). Monetary policy and business cycles with endogenous entry and product variety. NBER Macro Annual 2007, 299–354.Google Scholar
Bilbiie, F., Ghironi, F., and Melitz, M. (2008). Monopoly Power and Endogenous Variety: Distortions and Remedies. NBER working paper 14383.Google Scholar
Correia, I., Nicolini, J.P., and Teles, P. (2008) Optimal fiscal and monetary policy: Equivalence results. Journal of Political Economy 116 (1), 141–170.Google Scholar
Ireland, P. (1996) The Role Of Countercyclical Monetary Policy. Journal of Political Economy 104 vol. 4, 704–723.Google Scholar
Jaimovich, N. and Floetotto, M. (2008) Firm dynamics, markup variations, and the business cycle. Journal of Monetary Economics 55 (7), 1238–1252.Google Scholar
Khan, A., King, R., and Wolman, A. (2003) Optimal monetary policy. Review of Economic Studies 70 (4), 825–860.Google Scholar
Lagos, R. and Rocheteau, G. (2005) Inflation, output and welfare. International Economic Review 46, 495–522.Google Scholar
Lagos, R. and Wright, R. (2005) A unified framework for monetary theory and policy evaluation. Journal of Political Economy 113, 463–484.Google Scholar
Lewis, V. (2009) Optimal Monetary Policy and Firm Entry. NBB working paper 178, October.Google Scholar
Liu, L., Wang, L., and Wright, R. (2011) On the “hot potato” effect of inflation: Intensive versus extensive margins. Macroeconomic Dynamics 15 (S2), 191–216.Google Scholar
Lucas, R. (1987) Models of Business Cycles. Oxford, UK: Basil Blackwell.Google Scholar
Pissarides, C. (2000) Equilibrium Unemployment Theory, 2nd ed.Cambridge, MA: MIT Press.Google Scholar
Rocheteau, G. and Wright, R. (2005). Money in search equilibrium, in competitive equilibrium and in competitive search equilibrium. Econometrica 73, 75–202.Google Scholar
Rocheteau, G. and Wright, R. (2009) Inflation and welfare in models with trading frictions. In Altig, David E. and Nosal, Ed (eds.), Monetary Policy in Low Inflation Economies, pp. 89–116. Cambridge University Press.Google Scholar
Rogerson, R., Shimer, R., and Wright, R. (2005) Search-theoretic models of the labor market: A survey. Journal of Economic Literature 43, 959–988.Google Scholar
Shi, S. (1997) A divisible search model of fiat money. Econometrica 65, 75–102.Google Scholar