A unified framework for monetary theory and policy analysis

Ricardo Lagos and Randall Wright

No 346, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: 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.

Keywords: Monetary policy; Money (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (9)

Published in Journal of Political Economy> (Vol. 113, No. 3, June 2005, pp. 463-484)

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Related works:
Journal Article: A Unified Framework for Monetary Theory and Policy Analysis (2005)
Working Paper: A unified framework for monetary theory and policy analysis (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:346

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