An Open-Economy Model with Money, Endogenous Search, and Heterogeneous Firms

This paper is the first to describe a monetary general equilibrium model that features; (i) search frictions in the goods market, which create market power; (ii) endogenously chosen search effort by consumers, which mitigates this market power; (iii) heterogeneous firms and free entry; and (iv) an open economy, i.e. an arbitrary number of countries that trade goods and, potentially, assets. The model is flexible and well suited to studying questions in international macroeconomics, including the effects of monetary policy on production, firm entry, markups, trade, and welfare, at home or abroad. As part of this effort, I characterize a general class of matching processes which provide a novel approach to modeling firm sales: the number of customers per firm follows a bounded Pareto distribution with shape parameter less than or equal to one.