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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. Due to the informational frictions that give rise to money, households are unable to perfectly insure themselves 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, 2013. "Optimal Stabilization Policy with Search Externalities," MPRA Paper 59745, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59745
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    Cited by:

    1. 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.
    2. Savagar, Anthony & Dixon, Huw, 2020. "Firm entry, excess capacity and endogenous productivity," European Economic Review, Elsevier, vol. 121(C).
    3. Savagar, Anthony, 2021. "Measured productivity with endogenous markups and economic profits," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    4. 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.
    5. 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.
    6. Altermatt, Lukas, 2019. "Savings, asset scarcity, and monetary policy," Journal of Economic Theory, Elsevier, vol. 182(C), pages 329-359.
    7. 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.
    8. 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.
    9. 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.
    10. van Buggenum, Hugo, 2021. "Coexistence of Money and Interest-Bearing Bonds," Discussion Paper 2021-019, Tilburg University, Center for Economic Research.
    11. Mohammed Aït Lahcen, 2017. "Informality and the long run Phillips curve," ECON - Working Papers 248, Department of Economics - University of Zurich, revised Dec 2018.
    12. van Buggenum, Hugo, 2021. "Risk, Inside Money, and the Real Economy," Discussion Paper 2021-020, Tilburg University, Center for Economic Research.
    13. Jeong, Minhyeon, 2015. "Optimal policy in an economy with human capital where money is essential," Economics Letters, Elsevier, vol. 136(C), pages 103-107.
    14. Faria-e-Castro, Miguel, 2021. "Fiscal policy during a pandemic," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    monetary policy; optimal stabilization policy; search equilibrium; microfoundation of money;
    All these keywords.

    JEL classification:

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

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