Optimal money demand in a heterogeneous-agent cash-in-advance economy
AbstractHeterogeneity matters. This point is illustrated in a heterogeneous-agent, cash-in-advance economy where money serves both as a medium of exchange and as a store of value (as in Lucas, 1980). It is shown that heterogeneity can lead to dramatically different implications of monetary policies from those under the representative-agent assumption, including (i) the velocity of money is not constant but highly volatile, as in the data; (ii) lump-sum transitory money injections have expansionary effects on aggregate output despite flexible prices; and (iii) the welfare cost of anticipated inflation is potentially a couple of orders larger than the estimates of Cooley and Hansen (1989) based on a representative-agent, cash-in-advance economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-014.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-26 (All new papers)
- NEP-CBA-2010-06-26 (Central Banking)
- NEP-DGE-2010-06-26 (Dynamic General Equilibrium)
- NEP-MAC-2010-06-26 (Macroeconomics)
- NEP-MON-2010-06-26 (Monetary Economics)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).
If references are entirely missing, you can add them using this form.