The Role of Search Frictions for Output and Inflation Dynamics: A Bayesian Assessment

Martin Menner, Universidad de Alicante, Spain

Abstract

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. It dominates the other models in the ability to predict the autocorrelations of inflation, the contemporaneous correlation between output growth and inflation, and in the persistent (dis-)inflation process after a (technology) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models.