OPTIMAL MONETARY AND FISCAL POLICIES IN A SEARCH-THEORETIC MODEL OF MONEY AND UNEMPLOYMENT

In this paper we study optimal policies in an environment where search frictions both in labor and goods markets give rise to unemployment and fiat money, as in Berentsen, Menzio, and Wright (American Economic Review, 2011). The underlying frictions that give rise to endogenous unemployment and fiat...

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Bibliographic Details
Published in:Macroeconomic dynamics 2013-09, Vol.17 (6), p.1330-1354
Main Authors: Gomis-Porqueras, Pedro, Julien, Benoît, Wang, Chengsi
Format: Article
Language:English
Subjects:
Bargaining
Consumption
Economic activity
Economic theory
Employment
Equilibrium
Households
Labor market
Macroeconomics
Monetary policy
Phillips curve
Price levels
Subsidies
Tax rates
Unemployment
Workers
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Summary:In this paper we study optimal policies in an environment where search frictions both in labor and goods markets give rise to unemployment and fiat money, as in Berentsen, Menzio, and Wright (American Economic Review, 2011). The underlying frictions that give rise to endogenous unemployment and fiat money also result in inefficient outcomes. Here we show that efficiency can be restored whenever lump sum monetary transfers are possible and a decentralized production subsidy financed by money printing and a vacancy subsidy financed by a dividend tax exist. This is the case even when the Hosios and Friedman rules do not hold.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100512000016