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A Unified Framework for Monetary Theory and Policy Analysis
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TL;DR: This article proposed a framework based on explicit micro foundations within which macro policy can be analyzed and demonstrated that the model is both analytically tractable and amenable to quantitative analysis by using it to estimate the welfare cost of inflation.
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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.
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Citations
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The Bullionist Controversy: Theory and New Evidence
TL;DR: The authors reviewed the debate and developed a dynamic general equilibrium model that is capable of capturing key features of the 19th-century British financial system and provided support for the Bullionist position.
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Limited Commitment and the Demand for Money
TL;DR: The authors showed that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data and explain why the ratio of credit to Ml is currently so low, despite that nominal interest rates are at their lowest recorded levels.
Dynamic Indeterminacy and Welfare in Credit Economies
Zach Bethune,Tai-Wei Hu,Guillaume Rocheteau +2 more
- 01 Jul 2014
TL;DR: In this paper, the authors characterize the set of dynamic equilibria of a pure credit economy with random matching and limited commitment, and establish conditions under which the second welfare theorem of Alvarez and Jermann (2000) fails to apply to our economy.
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A note on the essentiality of money under limited memory
TL;DR: This article used a simplified version of Trejos and Wright's (1995) random matching environment to make a point about when fiat money is essential, that is, when the set of equilibrium outcomes is strictly larger with money than without Under two natural forms of limited memory, money becomes essential when small, idiosyncratic shocks to production costs are introduced.
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Preferences, inflation, and welfare
Michael Curran,Scott J. Dressler +1 more
TL;DR: In this article, the authors examine how household risk aversion and elasticity of intertemporal substitution (EIS) impact the welfare costs of inflation in a heterogeneous agent environment featuring capital and essential money.
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