A Unified Framework for Monetary Theory and Policy Analysis

49 Pages Posted: 12 Nov 2008

See all articles by Ricardo Lagos

Ricardo Lagos

New York University (NYU) - Department of Economics

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

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.

Suggested Citation

Lagos, Ricardo and Wright, Randall D., A Unified Framework for Monetary Theory and Policy Analysis (November 2003). NYU Working Paper No. S-MF-03-21. Available at SSRN: https://ssrn.com/abstract=1300224

Ricardo Lagos (Contact Author)

New York University (NYU) - Department of Economics ( email )

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Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

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Federal Reserve Banks - Federal Reserve Bank of Minneapolis

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