On the Role of Tax-Subsidy Scheme in Money Search Models (Subsequently published in "International Economic Review" 48, 2007, 575-606. )
This paper investigates the role of policy in money search models with divisible money. Recently, real indeterminacy of stationary equilibria has been found in both specific and general search models with divisible money. Thus if we assume the divisibility of money, it would be quite difficult to make accurate predictions of the effects of simple monetary policies. Instead, we show that some tax-subsidy schemes select a determinate efficient equilibrium. In other words, for a given efficient equilibrium and for any real number δ > 0, a certain tax-subsidy scheme induces a locally determinate equilibrium within the δ -neighborhood of the given equilibrium. Moreover, the size of the tax-subsidy can be arbitrarily small.