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Working Paper
Nonlinear Unemployment Effects of the Inflation Tax
We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – ...
Working Paper
Goods-Market Frictions and International Trade
We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it is time consuming and expensive for exporters and importers to meet. We show that search frictions lead to an endogenous fraction of unmatched exporters, alter the gains from trade, endogenize entry costs, and imply that the competitive equilibrium does not generally result in the socially optimal number of searching firms. Finally, ignoring search frictions results in biased estimates of the effect of ...
Working Paper
Search-Based Models of Money and Finance: An Integrated Approach
Many applications of search theory in monetary economics use the Shi-Trejos-Wright model, hereafter STW, while applications in finance use Duffie-Grleanu-Pederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between ...
Working Paper
Paying Too Much? Price Dispersion in the U.S. Mortgage Market
We document wide dispersion in the mortgage rates that households pay on identical loans, and show that borrowers' financial sophistication is an important determinant of the rates obtained. We estimate a gap between the 10th and 90th percentile mortgage rate that borrowers with the same characteristics obtain for identical loans, in the same market, on the same day, of 54 basis points|equivalent to about $6,500 in upfront costs (points) for the average loan. Time-invariant lender attributes explain little of this rate dispersion, and considerable dispersion remains even within loan officer. ...
Working Paper
Equilibrium Unemployment: The Role of Discrimination
U.S. labor markets are increasingly diverse and persistently unequal between genders, races and ethnicities, skill levels, and age groups. We use a structural model to decompose the observed differences in labor market outcomes across demographic groups in terms of underlying wedges in fundamentals. Of particular interest is the potential role of discrimination, either taste-based or statistical. Our model is a version of the Diamond-Mortensen-Pissarides model extended to include a life cycle, learning by doing, a nonparticipation state, and informational frictions. The model exhibits ...
Working Paper
Targeted Search in Matching Markets
We propose a parsimonious matching model where a person's choice of whom to meet endogenizes the degree of randomness in matching. The analysis highlights the interaction between a productive motive, driven by the surplus attainable in a match, and a strategic motive, driven by reciprocity of interest of potential matches. We find that the interaction between these two motives differs with preferences?vertical versus horizontal?and that this interaction implies that preferences recovered using our model can look markedly different from those recovered using a model where the degree of ...
Working Paper
Capacity Choice, Monetary Trade, and the Cost of Inflation
Firms often make production decisions before meeting a buyer. We incorporate this often-overlooked fact into an otherwise standard monetary search model and show that it has important implications for the set of equilibria, efficiency, and the cost of inflation. Our model features a strategic complementarity between the buyers' ex ante choice of money balances and sellers' ex ante choice of productive capacity. When resale value of unsold inventories is high, sellers carry excess capacity and the equilibrium is unique. But, when resale value is low, there is a continuum of equilibria, all of ...
Working Paper
Trade Dynamics in the Market for Federal Funds
We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they meet, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks.
Working Paper
A Theory of Sticky Rents: Search and Bargaining with Incomplete Information
The housing rental market offers a unique laboratory for studying price stickiness. This paper is motivated by two facts: 1. Tenants? rents are remarkably sticky even though regular and expected recontracting would, by itself, suggest substantial rent flexibility. 2. Rent stickiness varies significantly across structure type; for example, detached unit rents are far stickier than large apartment unit rents. We offer the first theoretical explanation of rent stickiness that is consistent with these facts. In this theory, search and bargaining with incomplete information generates stickiness in ...
Working Paper
Goods-Market Frictions and International Trade
We present a tractable framework that embeds goods-market frictions in a general equilibrium dynamic model with heterogeneous exporters and identical importers. These frictions arise because it takes time and expense for exporters and importers to meet. We show that search frictions lead to an endogenous fraction of unmatched exporters, alter the gains from trade, endogenize entry costs, and imply that the competitive equilibrium does not generally result in the socially optimal number of searching firms. Finally, ignoring search frictions results in biased estimates of the effect of tariffs ...