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The objective of this paper is to study optimal fiscal and monetary policy in a dynamic Mirrlees model where the frictions giving rise to money as a medium of exchange are explicitly modeled. The framework is a three period OLG model where agents are born every other period. The young and old trade in perfectly competitive centralized markets. In 'Middle age', agents receive preference shocks and trade amongst themselves in an anonymous search market. Money is essential in this market.
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