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Optimal Stabilization Policy With Search Externalities

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  • Berentsen, Aleksander
  • Waller, Christopher

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.

Suggested Citation

  • Berentsen, Aleksander & Waller, Christopher, 2015. "Optimal Stabilization Policy With Search Externalities," Macroeconomic Dynamics, Cambridge University Press, vol. 19(3), pages 669-700, April.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:03:p:669-700_00
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    Cited by:

    1. van Buggenum, Hugo, 2021. "Coexistence of Money and Interest-Bearing Bonds," Other publications TiSEM 0bd7c6fc-3779-4bf3-9100-0, Tilburg University, School of Economics and Management.
    2. van Buggenum, Hugo, 2023. "Coexistence of money and interest-bearing bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    3. Savagar, Anthony, 2021. "Measured productivity with endogenous markups and economic profits," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    4. Lukas Altermatt, 2022. "Inside Money, Investment, And Unconventional Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1527-1560, November.
    5. Savagar, Anthony & Dixon, Huw, 2020. "Firm entry, excess capacity and endogenous productivity," European Economic Review, Elsevier, vol. 121(C).
    6. Marta Aloi & Huw Dixon & Anthony Savagar, 2021. "Labor Responses, Regulation, and Business Churn," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(1), pages 119-156, February.
    7. Ryoji Hiraguchi & Keiichiro Kobayashi, 2023. "Inflation and entry costs in a monetary search model," CIGS Working Paper Series 23-013E, The Canon Institute for Global Studies.
    8. Fan, Haichao & Gao, Xiang & Xu, Juanyi & Xu, Zhiwei, 2016. "News shock, firm dynamics and business cycles: Evidence and theory," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 159-180.
    9. Jeong, Minhyeon, 2015. "Optimal policy in an economy with human capital where money is essential," Economics Letters, Elsevier, vol. 136(C), pages 103-107.
    10. Faria-e-Castro, Miguel, 2021. "Fiscal policy during a pandemic," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    11. Altermatt, Lukas, 2019. "Savings, asset scarcity, and monetary policy," Journal of Economic Theory, Elsevier, vol. 182(C), pages 329-359.
    12. Savagar, Anthony, 2021. "Measured productivity with endogenous markups and economic profits," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    13. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Other publications TiSEM daabe114-81fa-44fc-aafd-b, Tilburg University, School of Economics and Management.
    14. Mohammed Aït Lahcen, 2017. "Informality and the long run Phillips curve," ECON - Working Papers 248, Department of Economics - University of Zurich, revised Dec 2018.
    15. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Discussion Paper 2021-020, Tilburg University, Center for Economic Research.

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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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