A New Framework for Monetary Theory and Policy Analysis

University Of Pennsylvania, Philadelphia PA

Investigators

Abstract

This project develops a new framework for the analysis of monetary theory and policy. This model integrates desirable features of several models in the literature. In particular, it has the microfoundations of search-based monetary models; it shares many of the interesting theoretical implications of overlapping generations models; and it allows one to analyze relevant policy issues as one does in cash-in-advance models. Since the new model is explicit about the micro market structure that gives rise to a role for money in the first place, it allows detailed study of the generality and robustness of predictions from reduced-form approaches like cash-in-advance models. At the same time, the model goes well beyond most existing theories based on detailed micro structures, like the search-based models, in that those models typically assume very severe forms of inventory restrictions (e.g., agents can hold at most a very small amount of money). Those restrictions were imposed in this literature purely for technical reasons. The new framework does not need any such restrictions. Hence, it is well suited for macro policy and empirical analysis even though it has an explicit micro foundation. At the same time, even without technical restrictions on inventories, the new model is extremely tractable - one can derive many analytic results for fairly general specifications.