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A Monetary Theory with Non-Degenerate Distributions

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  • Shouyong Shi

    (University of Toronto)

  • Hongfei Sun

    (Queen's University)

  • Guido Menzio

    (University of Pennsylvania)

Abstract

At any given point of time in an actual economy, some individuals hold more money than other individuals do. This non-degenerate distribution of money holdings among individuals is a rationale for a range of policies designed for reallocating liquidity among individuals. However, monetary theory has often abstracted from this non-degenerate distribution for tractability reasons. In this paper, we construct a tractable search model of money with a non-degenerate distribution of money holdings. We model search as a directed process in the sense that buyers know the terms of trade before visiting particular sellers, as opposed to undirected search that has dominated the literature. In this model, the distribution of money holdings among individuals is non-degenerate. We show that this distribution affects individuals' decisions not directly, but rather indirectly only through a one-dimensional variable -- the seller's future marginal value of money. This result drastically reduces the state space of individuals' decisions and makes the model tractable. We analytically characterize a monetary equilibrium, using lattice-theoretic techniques, and prove existence of a monetary steady state. In the equilibrium, buyers follow a stylized spending pattern over time, and the money distribution has a persistent wealth effect.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 598.

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Date of creation: 2010
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Handle: RePEc:red:sed010:598

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A Monetary Theory with Non-Degenerate Distributions
    by Christian Zimmermann in NEP-DGE blog on 2011-04-11 02:44:40
  2. A Monetary Theory with Non-degenerate Distributions
    by Christian Zimmermann in NEP-DGE blog on 2013-09-09 00:45:08
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Mahmoudi, Babak, 2013. "Open-Market Operations, Asset Distributions, and Endogenous Market Segmentation," MPRA Paper 50089, University Library of Munich, Germany.
  2. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96 Elsevier.
  3. Zeno Enders, 2010. "Heterogeneous consumers, segmented asset markets,and the effects of monetary policy," Bonn Econ Discussion Papers bgse08_2010, University of Bonn, Germany.

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