A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity
Posted: 1 May 2017 Last revised: 24 Oct 2017
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A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity
Date Written: 2017-04-20
Abstract
We construct a continuous-time, New-Monetarist economy with general preferences 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. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of liquidity-trap equilibria and policy mix in terms of "helicopter drops" and open-market operations.
Keywords: money, inflation, risk sharing, liquidity traps
JEL Classification: E40, E50
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