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Optimal monetary policy with heterogeneous money holdings

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  • Lippi, Francesco
  • Ragni, Stefania
  • Trachter, Nicholas

Abstract

We study the optimal anticipated policy in a pure-currency economy with flexible prices and a non-degenerate distribution of money holdings. The economy features a business cycle and lump-sum monetary injections have distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state under commitment. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by the cash-poor unproductive agents. Conversely, the optimal policy prescribes monetary contractions during booms, so that the inflationary effect of the occasional expansions is undone.

Suggested Citation

  • Lippi, Francesco & Ragni, Stefania & Trachter, Nicholas, 2015. "Optimal monetary policy with heterogeneous money holdings," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 339-368.
  • Handle: RePEc:eee:jetheo:v:159:y:2015:i:pa:p:339-368
    DOI: 10.1016/j.jet.2015.07.005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chao Gu & Randall Wright, 2016. "Monetary Mechanisms," Working Papers 1601, Department of Economics, University of Missouri.
    2. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    3. Guillaume Rocheteau & Pierre-Olivier Weill & Tsz-Nga Wong, 2015. "A Tractable Model of Monetary Exchange with Ex-post Heterogeneity," NBER Working Papers 21179, National Bureau of Economic Research, Inc.
    4. Bilbiie, Florin Ovidiu & Ragot, Xavier, 2017. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," CEPR Discussion Papers 11814, C.E.P.R. Discussion Papers.
    5. Zeno Enders, 2017. "Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy," CESifo Working Paper Series 6467, CESifo Group Munich.
    6. Nicola Amendola & Leo Ferraris & Fabrizio Mattesini, 2016. "Optimal Monetary Policy in a Pure Currency Economy with Heterogenous Agents," CEIS Research Paper 394, Tor Vergata University, CEIS, revised 02 Feb 2017.
    7. Andreas Schabert, 2017. "Welfare-Enhancing Distributional Effects of Central Bank Asset Purchases," Working Paper Series in Economics 94, University of Cologne, Department of Economics.
    8. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.

    More about this item

    Keywords

    Heterogeneous agents; Redistributive monetary policy; Pure currency; Precautionary savings; Friedman rule;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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