Abstract
Abstract This paper examines the redistributive role of expansionary monetary policies. For this purpose a physical environment with heterogeneous agents is described to emphasize two frictions. One is a within-market friction that agents cannot borrow within each market; the other is a cross-market friction that agents cannot borrow across markets. Although a contractionary monetary policy is required to eliminate the within-market friction, as in many previous monetary models, an expansionary monetary policy is required to eliminate the cross-market friction. When both frictions are operational, no monetary policy alone can restore efficiency and the second-best monetary policy requires the money growth rate to exceed the Friedman rule. The first-best allocation can be achieved by a combination of fiscal policies and the Friedman rule.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have