Publication: The role of search frictions for output and inflation dynamics: a Bayesian assessment
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2007-09
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Abstract
Search frictions in the goods market have proven to be a fruitful deviation from the fiction of a centralized Walrasian market providing a micro-foundation of the use of money as a medium of exchange. Moreover, persistent propagation of monetary shocks can arise in search-theoretic monetary models through the interaction of search-frictions in the goods and labor markets, and
inventory holdings.
Here, a search-theoretic monetary DSGE model with capital and inventory investment is
estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification.
The search model can track inflation and output data better, as well as it dominates the other models in the ability to predict the autocorrelations of inflation and the persistent disinflation process after a technology shock. It generates a hump-shaped but not strong enough output response to a monetary shock. Current and near current correlations between output growth
inflation are predicted well.
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Monetary search-theory, Labor market search, Inflation and output dynamics, Bayesian estimation, DSGE model