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A Unified Framework for Monetary Theory and Policy Analysis

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  • Ricardo Lagos
  • Randall Wright

Abstract

Search-theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential. However, tractable versions of these models typically need strong assumptions that make them ill-suited for studying monetary policy. We propose a framework based on explicit micro foundations within which macro policy can be analyzed. The model is both analytically tractable and amenable to quantitative analysis. We demonstrate this by using it to estimate the welfare cost of inflation. We find much higher costs than the previous literature: our model predicts that going from 10% to 0% inflation can be worth between 3% and 5% of consumption.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 113 (2005)
Issue (Month): 3 (June)
Pages: 463-484

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Handle: RePEc:ucp:jpolec:v:113:y:2005:i:3:p:463-484

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References

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Optimal Monetary and Fiscal Policies In a Search-theoretic Model of Money and Unemployment
    by Christian Zimmermann in NEP-DGE blog on 2010-11-20 21:05:53
  2. Search Frictions and Asset Price Volatility
    by Christian Zimmermann in NEP-DGE blog on 2010-01-18 05:02:28
  3. Lagos-Wright with a New Keynesian Flavor!
    by paragwaknis in Musings of the Sorts on 2011-01-11 22:46:49
  4. Payment Systems in India
    by paragwaknis in Musings of the Sorts on 2012-08-05 21:20:51
  5. A Monetary Theory with Non-degenerate Distributions
    by Christian Zimmermann in NEP-DGE blog on 2013-09-09 00:45:08
  6. Teachable Moment
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-12-02 00:19:00
  7. Secular Stagnation and Forgotten Monetary Economics
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2014-05-14 01:21:00
  8. Why Hold Money?
    by Agent Continuum in Agent Continuum on 2009-11-19 10:00:09
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