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Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange

Author

Listed:
  • Jonathan Chiu

    (Bank of Canada)

  • Miguel Molico

    (Bank of Canada)

Abstract

We study the short-run effects of monetary policy in a search-theoretic monetary model in which agents are subject to idiosyncratic liquidity shocks as well as aggregate monetary shocks. Namely, we analyze the role of the endogenous non-degenerate distribution of liquidity, liquidity constraints, and decentralized trade, for the transmission and propagation of monetary policy shocks. Money is injected through lump-sum transfers which have redistributive and persistent effects on output and prices. We propose a new numerical algorithm in the spirit of Algan et al. (2008) to solve the model. We find that a one-time expansionary monetary policy shock has persistent positive effects on output, prices, and welfare, even in the absence of nominal rigidities. Furthermore, the effects of positive and negative monetary shocks are typically asymmetric. Negative (contractionary) shocks have bigger effects than positive (expansionary) shocks. In addition, in an economy with larger shocks, the responses tend to be disproportionately larger than those in an economy with smaller shocks. Finally, the effectiveness of monetary shocks depends on the steady-state level of inflation. The higher the average level of inflation (money growth), the bigger the impact effect of a shock of a given size but the smaller its cumulative effect. These results are consistent with existing empirical evidence. (Copyright: Elsevier)

Suggested Citation

  • Jonathan Chiu & Miguel Molico, 2021. "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 133-155, October.
    • Handle: RePEc:red:issued:18-446
    DOI: 10.1016/j.red.2020.10.009
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange
      by Christian Zimmermann in NEP-DGE blog on 2020-12-09 16:22:26

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    More about this item

    Keywords

    Search; Money; Aggregate uncertainty; Idiosyncratic uncertainty; Monetary policy; Redistribution; Inflation;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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