This article studies optimal monetary policy in an economy with endogenous search decisions. We show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades. The Friedman rule eliminates the first...

In this paper the authors study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. They show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades...

We use a general equilibrium model of money to compare the use of `illiquid' government-issued bonds (outside bonds) versus credit (inside bonds) to alleviate buyers' liquidity constraints. We assume all transactions must be voluntary. This implies that the central bank cannot run deflation via...

Inflation and unemployment are central issues in macroeconomics. While much progress has been made on these issues by incorporating frictions using search theory, existing models analyze either unemployment or inflation. We develop a framework to analyze unemployment and inflation together. This...

Can there be too much trading in financial markets? We construct a dynamic general equilibrium model, where agents face idiosyncratic liquidity shocks. A financial market allows agents to adjust their portfolio of liquid and illiquid assets in response to these shocks. The optimal policy is to...