Optimal Monetary and Fiscal Policies in a Search-Theoretic Model of Money and Unemployment

Abstract

In this paper we study the optimal monetary and fiscal policies of a general equilibrium model of unemployment and money with search frictions both in labor and goods markets as in Berentsen, Menzio and Wright (2010). We abstract from revenue-raising motives to focus on the welfare-enhancing properties of optimal policies. We show that some of the inefficiencies in the Berentsen, Menzio and Wright (2010) framework can be restored with appropriate fiscal policies. In particular, when lump sum monetary transfers are possible, a production subsidy financed by money printing can increase output in the decentralized market and a vacancy subsidy financed by a dividend tax even when the Hosios' rule does not hold. JEL Classification: E52, E63.

Fiscal Requirements for Dynamic and Real Determinacies in Economies with Private Provision of Liquidity: A Monetarist Assessment

“…Furthermore, the economy is typically non‐Ricardian as it generates a bond liquidity Laffer curve, delivering real indeterminacies. These equilibrium properties cannot be observed in Gomis‐Porqueras, Julien, and Wang () as fiat money is the only durable asset in the economy.…”

“…The monetary equilibrium delivers a positive long‐run relationship between inflation and unemployment. Within the same environment, where fiat money is the only durable asset, Gomis‐Porqueras, Julien, and Wang () show how a production subsidy in the frictional goods market and a vacancy subsidy (financed by a dividend tax) can deliver efficiency at the intensive and extensive margin even when the Hosios condition does not hold. Augmenting Berentsen, Rocheteau, and Shi () framework with public debt, Dong and Xiao () study how a change in the supply of government bonds through open market operations affects real allocations.…”

“…In contrast to the optimal policy analysis of Gomis‐Porqueras, Julien, and Wang (), this paper studies the impact of fiscal rules and the government's taxing capacity on the inherent links among inflation, unemployment, and asset prices. This analysis is conducted in an environment where firms provide liquidity.…”

“…This analysis is conducted in an environment where firms provide liquidity. Moreover, as opposed to Gomis‐Porqueras, Julien, and Wang () and Dong and Xiao (), fiat money, nominal government bonds, and private assets, issued by firms, can be used as store of value and media of exchange. As a result, when agents face public and private asset scarcity, labor market conditions affect asset prices, public debt, and inflation as firms link both the labor and asset markets.…”

Directed Search and Competitive Search Equilibrium: A Guided Tour

“…There is no CM in this environment, but it can be interesting to add one(Berentsen, Menzio, and Wright 2011;Gomis-Porqueras, Julien, and Wang 2013;Zhang and Huangfu 2018; Dong and Xiao 2014).…”