The long-run redistributive effects of monetary policy

Abstract

Using a general equilibrium search-theoretic model of money, I study the long-run distributional effects of monetary policy. In my model, heterogeneous agents trade bilaterally in a frictional market and save using cash and illiquid short-term nominal government bonds. Wealth effects generate slow adjustments in agents’ portfolios following their trading activity in decentralized markets, giving rise to a persistent and non-degenerate distribution of assets. The model reproduces the distribution of asset levels and portfolios across households observed in the data. I show that, as wealth inequality increases the incidence of inefficiencies in decentralized trading, policies that improve the ability to self-insure against idiosyncratic shocks are welfare-improving and redistribute resources towards agents that are relatively poor and more liquidity constrained.