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Optimal Monetary and Fiscal Policies in a Search-Theoretic Model of Money and Unemployment

  • Pedro Gomis-Porqueras


    (School of Economics, Australian National University)

  • Benoit Julien


    (School of Economics, University of New South Wales)

  • Chengsi Wang


    (School of Economics, University of New South Wales)

In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios’ rule does not hold.

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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2010-23.

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Length: 23 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:swe:wpaper:2010-23
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  1. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
  2. Martin Eichenbaum & Lawrence J. Christiano, 1992. "Liquidity Effects, Monetary Policy, and the Business Cycle," NBER Working Papers 4129, National Bureau of Economic Research, Inc.
  3. repec:bla:restud:v:61:y:1994:i:3:p:397-415 is not listed on IDEAS
  4. Lehmann, Etienne, 2006. "A Search Model of Unemployment and Inflation," IZA Discussion Papers 2194, Institute for the Study of Labor (IZA).
  5. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, . "Friedman Meets Hosios: Efficiency in Search Models of Money," IEW - Working Papers 154, Institute for Empirical Research in Economics - University of Zurich.
  6. repec:bla:restud:v:57:y:1990:i:2:p:279-98 is not listed on IDEAS
  7. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  8. Aleksander Berentsen & Guido Menzio & Randall Wright, 2008. "Inflation and Unemployment in the Long Run," PIER Working Paper Archive 08-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers 966, Queen's University, Department of Economics.
  10. Cooley, Thomas F. & Quadrini, Vincenzo, 2004. "Optimal monetary policy in a Phillips-curve world," Journal of Economic Theory, Elsevier, vol. 118(2), pages 174-208, October.
  11. Joshua N. Feinman, 1993. "Reserve requirements: history, current practice, and potential reform," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 569-589.
  12. Gomis-Porqueras, Pedro & Peralta-Alva, Adrian, 2010. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," European Economic Review, Elsevier, vol. 54(3), pages 331-344, April.
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