TY  - JOUR
AU  - Aruoba,S. Boragan
AU  - Schorfheide,Frank
TI  - Sticky Prices Versus Monetary Frictions: An Estimation of Policy Trade-offs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14870
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14870
L1  - http://www.nber.org/papers/w14870.pdf
N1  - Author contact info:
S. Boragan Aruoba
Department of Economics
University of Maryland
3105 Tydings Hall
College Park, MD 20742-7211
Tel: 301/405-3523
E-Mail: aruoba@econ.umd.edu

Frank Schorfheide
University of Pennsylvania
Department of Economics
3718 Locust Walk
McNeil 525
Philadelphia, PA 19104-6297
Tel: 215/898-8486
Fax: 215/573-2057
E-Mail: schorf@ssc.upenn.edu
AB  - We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. We document its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion against the distortion caused by taxing money and hence transactions in the decentralized market. Target rates of -1% or less maximize the social welfare function we consider, which contrasts with results derived from a cashless New Keynesian model.
ER  -