OPTIMAL STABILIZATION POLICY WITH SEARCH EXTERNALITIES

Aleksander Berentsen and Christopher Waller

Macroeconomic Dynamics, 2015, vol. 19, issue 3, 669-700

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. Because of the informational frictions that give rise to money, households are unable to insure themselves perfectly 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.

Date: 2015
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Working Paper: Optimal Stabilization Policy with Search Externalities (2013)
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