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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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    Cited by:

    1. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Russell, 2018. "A tractable model of monetary exchange with ex-post heterogeneity," Theoretical Economics, Econometric Society, vol. 13(3), September.
    2. repec:hal:spmain:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    3. Xavier Ragot, 2018. "Limited Participation, Capital Accumulation and Optimal Monetary Policy," Sciences Po publications 2018-12, Sciences Po.
    4. Galo Nuño & Carlos Thomas, 2020. "Optimal Monetary Policy with Heterogeneous Agents," CESifo Working Paper Series 8670, CESifo.
    5. Florin Bilbiie & Xavier Ragot, 2021. "Optimal Monetary Policy and Liquidity with Heterogeneous Households," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 71-95, July.
    6. Sterk, Vincent & Tenreyro, Silvana, 2018. "The transmission of monetary policy through redistributions and durable purchases," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 124-137.
    7. Xavier Ragot & Florin O. Bilbiie, 2016. "Monetary Policy, Inflation, and Inequality: The Case for Helicopters," 2016 Meeting Papers 1663, Society for Economic Dynamics.
    8. Zeno Enders, 2020. "Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy," The Economic Journal, Royal Economic Society, vol. 130(628), pages 1031-1056.
    9. Lorenzo Carbonari & Fabrizio Mattesini & Robert J. Waldmann, 2023. "Inflation and Welfare in a Competitive Search Equilibrium with Asymmetric Information," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 717-746, June.
    10. 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.
    11. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Tsz-Nga, 2021. "An heterogeneous-agent New-Monetarist model with an application to unemployment," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 64-90.
    12. Bayer, Christian & Rendall, Alan D. & Wälde, Klaus, 2019. "The invariant distribution of wealth and employment status in a small open economy with precautionary savings," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 17-37.
    13. Saki Bigio & Yuliy Sannikov, 2019. "A Model of Intermediation, Money, Interest, and Prices," Working Papers 150, Peruvian Economic Association.
    14. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.
    15. Jin, Gu & Zhu, Tao, 2022. "Heterogeneity, decentralized trade, and the long-run real effects of inflation," Journal of Economic Theory, Elsevier, vol. 201(C).
    16. repec:hal:wpspec:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    17. Hu, Tai-Wei & Shmaya, Eran, 2019. "Unique monetary equilibrium with inflation in a stationary Bewley–Aiyagari model," Journal of Economic Theory, Elsevier, vol. 180(C), pages 368-382.
    18. Andreas Schabert, 2017. "Welfare-Enhancing Distributional Effects of Central Bank Asset Purchases," Working Paper Series in Economics 94, University of Cologne, Department of Economics.
    19. repec:hal:wpspec:info:hdl:2441/j75mfllkr89c8aod1nr586ksc is not listed on IDEAS
    20. repec:hal:spmain:info:hdl:2441/j7nncuouv9a0af4mubojrr2vc is not listed on IDEAS
    21. Russell Wong, 2018. "Self-Insurance and the Risk-Sharing Role of Money," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 35-52.

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    More about this item

    Keywords

    Heterogeneous agents; Redistributive monetary policy; Pure currency; Precautionary savings; Friedman rule;
    All these keywords.

    JEL classification:

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

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