Optimal Stabilization Policy with Search Externalities

Aleksander Berentsen and Christopher Waller

MPRA Paper from University Library of Munich, Germany

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.

Keywords: monetary policy; optimal stabilization policy; search equilibrium; microfoundation of money (search for similar items in EconPapers)
JEL-codes: E00 E40 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: OPTIMAL STABILIZATION POLICY WITH SEARCH EXTERNALITIES (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:59745

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