Optimal monetary policy with heterogeneous money holdings

Abstract

We study the optimal anticipated policy in a pure-currency economy with flexible prices and a nondegenerate distribution of money holdings. The economy features a business cycle and lump-sum monetary injections have distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state under commitment. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by the cash-poor unproductive agents. Conversely, the optimal policy prescribes monetary contractions during booms, so that the inflationary effect of the occasional expansions is undone.

Optimal monetary policy and liquidity with heterogeneous households

“…In our model, money is used to self-insure against idiosyncratic shocks as in Bewley models, but only for non-participating agents as in the Baumol-Tobin literature. Some of the key contributions, all with ‡exible prices, include Bewley (1983); Scheinkman and Weiss (1986);Lucas, (1990); Kehoe, Levine, and Woodford (1992); Algan, Challe, and Ragot (2010); ; Khan and Thomas (2015); Cao et al (2016); Lippi, Ragni and Trachter (2015); Gottlieb (2015); Wong (2015, 2016); and Ragot (2016). 10 Drawing on this literature, two assumptions are key to deliver our model's tractability.…”

Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy

“…However, as also pointed out by Menzio et al (2013) in the context of a search model of money, longer-lasting non-degenerate wealth distributions can have potentially important effects. This is also demonstrated by Lippi et al (2015), who derive the optimal anticipated monetary policy in a model with a non-degenerate wealth distribution. The model is tractable because there are only two types of agents that exogenously switch between being productive and unproductive.…”

Optimal Monetary Policy in a Pure Currency Economy with Heterogenous Agents

“…which is unambiguously determined by the price e¤ect. Finally, the e¤ect of policy on the price can be computed di¤erentiating (14) with respect to the policy parameter, at the SME, obtaining…”