Distribution Of Money Holdings Research Articles

Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy

Abstract This article proposes a novel mechanism by which changes in the distribution of money holdings have real aggregate effects. I develop a flexible-price model of segmented asset markets in which monetary policy influences the aggregate demand elasticity via heterogenous money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and pro-cyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

LIQUIDITY EXTERNALITIES AND THE WALLACE CONJECTURE

This paper presents a pure currency economy with a nondegenerate distribution of money holdings in which, as conjectured by Wallace (Quarterly Journal of Economics 129, 259–274, 2014), there are transfer schemes financed by money creation that improve ex ante welfare relative to no-intervention. Differently from what was advocated by Wallace, pecuniary-like externalities, rather than the need to share liquidity risks, are responsible for the result.

Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy

This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.

Uncertainty, Inflation, and Welfare

This paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk, in a microfounded search‐theoretical monetary model. We calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness. We show that in the presence of imperfect insurance the estimated long‐run welfare costs of inflation are on average 40% to 55% smaller compared to a complete markets, representative agent economy, and that inflation induces important redistributive effects across households.

Liquidity, Quality, Production Cost, and Welfare in a Search Model of Money

This paper examines a search model of money with divisible commodities of high and low quality, while keeping the assumptions of indivisible money and unit-inventory constraint. With no direct barter and a higher fixed cost of producing high relative to low quality, an increase in the money stock encourages the production of high-quality output by trading off the larger trading opportunities against the significance of higher fixed cost. As long as the fixed-cost differential between high and low quality is sufficiently small relative to the utility gain from high-quality consumption, the quality improvement outweighs the negative effect of higher money stocks on aggregate production, and hence implies higher welfare. The most important function of money is its role as a medium of exchange. Wicksell ([1906] 1967, p. 17) defined a general medium of exchange to be an object 'which is habitually, and without hesitation, taken by anybody in exchange for any commodity.' The main challenge facing monetary theory is to construct a model which permits the object's role in exchange to be endogenous.1 Kiyotaki and Wright (1991, 1993) seems to be the first fully coherent model which specifies the environment and equilibrium concept in a way that does not force at the outset the assumption on which objects will play a special role in trade. The Kiyotaki-Wright model departs from the physical environment of the standard general equilibrium model through the assumption that trading histories are private information. The medium-of-exchange role of money is obtained as an outcome of Nash equilibrium together with some bargaining rule in pairwise random meetings. However, the standard Kiyotaki-Wright model yields an undesirable welfare implication that an increase in the money stock eventually leads to a decrease in welfare because of a decrease in the number of agents who get to consume in a given period. The same welfare property is obtained in the models with divisible commodities, such as Trejos and Wright (1995) and Shi (1995).2 This property has been regarded as the outcome of the original Kiyotaki-Wright assumptions of indivisible money and the inventory constraint - agents can only carry one object, either commodity or money, at a time. Despite simplifying the distribution of money holdings, these assumptions impose the restriction that agents are not allowed to produce while they hold money.

Money, fiscal policy and the Cambridge theorem

This paper extends the Cambridge theory of income distribution to a monetary economy and explores the implications of fiscal deficits that are money financed. It is shown that the Pasinetti Paradox represents a special case applicable to either a nonmonetary economy or a monetary economy with constant prices. Once steady-state inflation is introduced, this generates an inflation tax on money holdings which affects saving. If the distribution of money holdings depends upon relative consumption shares, then the savings propensity of workers affects the distribution of the burden of the inflation tax, which in turn affects the profit rate and profit share. Copyright 1997 by Oxford University Press.