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A Monetary Theory with Non-Degenerate Distributions

Author

Listed:
  • Guido Menzio

    () (University of Pennsylvania)

  • Shouyong Shi

    () (University of Toronto)

  • Hongfei Sun

    () (Queen's University)

Abstract

Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, we fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. We assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals' policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself. Block recursivity enables us to characterize the equilibrium analytically. By adapting lattice-theoretic techniques, we characterize individuals' policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate and analyze the properties of this distribution.

Suggested Citation

  • Guido Menzio & Shouyong Shi & Hongfei Sun, 2011. "A Monetary Theory with Non-Degenerate Distributions," Working Papers 1264, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1264
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    References listed on IDEAS

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    1. repec:the:publsh:2821 is not listed on IDEAS
    2. 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.
    3. Maurizio Iacopetta, 2014. "Dynamics of assets liquidity and inequality in economies with decentralized markets," Sciences Po publications info:hdl:2441/2029nqlehl8, Sciences Po.
    4. Jung, Kuk Mo, 2018. "Uncertainty-induced dynamic inefficiency and the optimal inflation rate," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 486-506.
    5. Yashar Blouri, Maximilian v. Ehrlich, 2017. "On the optimal design of place-based policies: A structural evaluation of EU regional transfers," Diskussionsschriften dp1702, Universitaet Bern, Departement Volkswirtschaft.
    6. Garth Baughman & Stanislav Rabinovich, 2018. "Self-confirming Price Dispersion in Monetary Economies," Finance and Economics Discussion Series 2018-046, Board of Governors of the Federal Reserve System (U.S.).
    7. Tsz-Nga Wong & Pierre-Olivier Weill & Guillaume Rocheteau, 2015. "Long-Run and Short-Run Effects of Money Injections," 2015 Meeting Papers 793, Society for Economic Dynamics.
    8. 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.
    9. Guillaume Rocheteau & Pierre-Olivier Weill & Tsz-Nga Wong, 2015. "Working through the Distribution: Money in the Short and Long Run," NBER Working Papers 21779, National Bureau of Economic Research, Inc.
    10. Chao Gu & Randall Wright, 2016. "Monetary Mechanisms," Working Papers 1601, Department of Economics, University of Missouri.
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    12. Zeno Enders, 2017. "Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy," CESifo Working Paper Series 6467, CESifo Group Munich.
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    15. repec:eee:jetheo:v:172:y:2017:i:c:p:423-450 is not listed on IDEAS
    16. Enders, Zeno, 2012. "Heterogeneous consumers, segmented asset markets, and the effects of monetary policy," Working Papers 0537, University of Heidelberg, Department of Economics.
    17. Mohammad Davoodalhosseini, 2017. "Constrained Efficiency with Adverse Selection and Directed Search," Staff Working Papers 17-15, Bank of Canada.
    18. Mahmoudi, Babak, 2013. "Open-Market Operations, Asset Distributions, and Endogenous Market Segmentation," MPRA Paper 50089, University Library of Munich, Germany.

    More about this item

    Keywords

    Search; Distribution; Money; Lattice-Theoretic;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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