A Unified Framework for Monetary Theory and Policy Analysis

Posted: 12 May 2005

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

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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 make strong assumptions that render them ill suited for monetary policy analysis. We propose a new framework, based on explicit micro foundations, within which macro policy can be studied. The framework is analytically tractable and easily quantifiable. We calibrate the model to standard observations and use it to measure the cost of inflation. We find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption - much higher than previous estimates.

Suggested Citation

Lagos, Ricardo and Wright, Randall D., A Unified Framework for Monetary Theory and Policy Analysis. Journal of Political Economy, Vol. 113, pp. 463-484, June 2005. Available at SSRN: https://ssrn.com/abstract=720062

Ricardo Lagos

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

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Randall D. Wright (Contact Author)

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

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

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Minneapolis, MN 55480
United States

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