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A Unified Framework for Monetary Theory and Policy Analysis

  • Ricardo Lagos
  • Randall Wright

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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File URL: http://dx.doi.org/10.1086/429804
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File URL: http://dx.doi.org/10.1086/429804
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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
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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