A tractable model of monetary exchange with ex-post heterogeneity

We construct a continuous-time, New-Monetarist economy that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. Lump-sum transfers financed with money creation are we...

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Bibliographic Details
Published in:Theoretical economics 2018-09, Vol.13 (3), p.1369-1423
Main Authors: Rocheteau, Guillaume, Weill, Pierre-Olivier, Wong, Russell
Format: Article
Language:English
Subjects:
Analysis
Bonds
E40
E50
Economic models
Economic theory
Endogenous
Equilibrium
Government bonds
Government securities
inflation
Labor market
Labor productivity
Liquidity
Liquidity (Finance)
liquidity traps
Monetary policy
Money
Productivity
risk sharing
Welfare
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Summary:We construct a continuous-time, New-Monetarist economy that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. Lump-sum transfers financed with money creation are welfare-enhancing when labor productivity is low whereas regressive transfers approach first best when labor productivity is high and agents are not too impatient. We introduce illiquid government bonds and draw implications for liquidity-trap equilibria. We also study transitional dynamics under quadratic preferences and the velocity of money under heterogeneous preference shocks.
ISSN:1555-7561
1933-6837
1555-7561
DOI:10.3982/TE2821