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AN OPEN‐ECONOMY MODEL WITH MONEY, ENDOGENOUS SEARCH, AND HETEROGENEOUS FIRMS
Author(s) -
Herrenbrueck Lucas
Publication year - 2017
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12471
Subject(s) - economics , matching (statistics) , inflation (cosmology) , market power , open economy , microeconomics , small open economy , search cost , friedman rule , monetary economics , monetary policy , exchange rate , monopoly , statistics , physics , mathematics , theoretical physics
This paper describes a new monetary open‐economy model where firms have market power due to search frictions in the goods market, and endogenous search effort by consumers mitigates this market power. The optimal inflation rate generally depends positively on the cost of search effort, the cost of firm entry, and the cost of trade. Higher inflation always improves a country's terms‐of‐trade against its trading partners. I also characterize a general class of matching processes which offer a novel approach to modeling firm sales. ( JEL D43, E40, F12)