Working through the Distribution: Money in the Short and Long Run

Abstract

We construct a tractable model of monetary exchange with search and bargaining that features a nondegenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. While money is neutral in the long run, a one-time money injection in a centralized market with flexible prices generates an increase in aggregate real balances in the short run, a decrease in the rate of return of money, and a redistribution of consumption levels across agents. The price level in the short run varies in a non-monotonic fashion with the size of the money injection, e.g., small injections can lead to short-run deflation while large injections generate inflation. We extend our model to include employment risk and show that repeated money injections can raise output and welfare when unemployment is high.

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.…”

Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach

“…The main differences between their paper and ours are: (i) they analyze a partial equilibrium framework whereas we consider a general equilibrium framework, and (ii) we develop a numerical algorithm for solving both stationary and time-varying equilibria, thereby actually "operationalizing" the analysis of this class of models. 14,15 Also closely related, Rocheteau, Weill, and Wong (2015) propose an elegant alternative general equilibrium model with incomplete markets in continuous time. Market incompleteness in their framework stems from lumpy consumption expenditure shocks (e.g.…”

Optimal Taxes Under Private Information: The Role of Inflation

“…This implies the distribution of money holdings is not degenerate and a policymaker would be confronting an e¢ ciency/risk sharing tradeo¤ similar to what we study. See Rocheteau et al (2015) for a related restriction on hours worked in the LW framework.…”

“…He also shows that the Friedman rule is optimal despite the variance in CM consumption and leisure. 8 Rocheteau et al (2015) study the optimality of in ‡ation in the LW model when CM labor has a binding upper bound. They show that if this upper bound holds for some agents, then the distribution of money holdings is not degenerate and a one-time increase in the money supply can be welfare improving.…”