We construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with money and nominal government bonds, but all trades must be monetary. We demonstrate that a deflationary policy à la Friedman cannot sustain the constrainedefficient allocation as no-arbitrage imposes too stringent a bound on the return money can pay. The constrained-efficient allocation can be sustained when bonds have positive yields and, under certain conditions, only if they are illiquid. Illiquidity, meaning that bonds cannot be transformed into consumption as easily as cash, is necessary to eliminate arbitrage opportunities due to disparities in shadow interest rates.

The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.

The welfare cost of anticipated inflation is quantified in a calibrated model of the U.S. economy that exhibits tractable equilibrium dispersion in wealth and earnings. Inflation does not generate large losses in societal welfare, yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy. If money is the only asset, then inflation hurts mostly the wealthier and more productive agents, while those poorer and less productive may even benefit from inflation. The converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money.

The welfare cost of anticipated inflation is quantified in a matching model of money calibrated to 23 different OECD countries for several sample periods. In most economies, in the common period 1978–1998, a representative agent would give up only a fraction of 1% of consumption to avoid 10% inflation. The welfare cost of inflation varies across countries, from a fraction of 0.1% in Japan, to more than 2% in Australia, reaching 6% with bargaining. The model fits money demand data of several countries poorly, however. The fit generally improves with longer sample periods. The results are fairly robust to variations in choice of calibrated parameters and calibration targets.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. we …nd that quantitative easing can be welfare improving even at the zero lower bound. This is because such policy temporarily relaxes the liquidity constraint of impatient agents, without harming the patient ones. Moreover, due to a pricing externality, quantitative easing may also have bene…cial general equilibrium e¤ects for the patient agents even if they are unconstrained in their holdings of real balances. Last, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt. Terms of use: Documents in

We construct a monetary economy with aggregate liquidity shocks and heterogeneous idiosyncratic preference shocks. In this environment, not all agents are satiated at the zero lower bound (ZLB) even when the Friedman rule is the best interest‐rate policy the central bank can implement. As a consequence, central bank stabilization policy, which takes the form of repo arrangements in response to aggregate demand shocks, temporarily relaxes the liquidity constraint of impatient agents at the ZLB. Due to a pecuniary externality, this policy may have beneficial general equilibrium effects for patient agents even if they are unconstrained in their money balances.

No abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. we …nd that quantitative easing can be welfare improving even at the zero lower bound. This is because such policy temporarily relaxes the liquidity constraint of impatient agents, without harming the patient ones. Moreover, due to a pricing externality, quantitative easing may also have bene…cial general equilibrium e¤ects for the patient agents even if they are unconstrained in their holdings of real balances. Last, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt. Terms of use: Documents in