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OPTIMAL STABILIZATION POLICY WITH SEARCH EXTERNALITIES

journal contribution
posted on 2015-04-01, 00:00 authored by A Berentsen, Christopher Waller
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.

History

Journal

Macroeconomic Dynamics

Volume

19

Issue

03

Pagination

669 - 700

Publisher

Cambridge University Press (CUP)

Location

United Kingdom

ISSN

1365-1005

eISSN

1469-8056

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2013 Cambridge University Press

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