SEARCH, LIMITED PARTICIPATION, AND MONETARY POLICY∗

A model is developed that employs recent developments in the literature on search models of money to capture the distributional effects of monetary policy in a tractable way. Deterministic and stochastic versions of the model are studied. Money is not neutral, and these nonneutralities persist, whether or not the change in the money supply is anticipated or unanticipated. At the optimum, monetary policy is geared to correcting distortions in the search sector of the economy, while correcting for the persistent effects of past monetary policy actions.