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A Monetary Theory with Non-Degenerate Distributions

Author

Listed:
  • 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.

Suggested Citation

  • Shouyong Shi & Hongfei Sun & Guido Menzio, 2010. "A Monetary Theory with Non-Degenerate Distributions," 2010 Meeting Papers 598, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:598
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    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 07:44:40
    2. A Monetary Theory with Non-degenerate Distributions
      by Christian Zimmermann in NEP-DGE blog on 2013-09-09 05:45:08

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    Cited by:

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    2. Kubota, So, 2019. "Market Structure and Indeterminacy of Stationary Equilibria in a Decentralized Monetary Economy," Discussion paper series HIAS-E-84, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    3. Zeno Enders, 2020. "Heterogeneous Consumers, Segmented Asset Markets and the Real Effects of Monetary Policy," Economic Journal, Royal Economic Society, vol. 130(628), pages 1031-1056.
    4. Beverly Lapham & Ayman Mnasri, 2019. "Exchange Rate Pass-Through: A Competitive Search Approach," Working Paper 1418, Economics Department, Queen's University.
    5. Maurizio Iacopetta, 2014. "Dynamics of assets liquidity and inequality in economies with decentralized markets," Sciences Po publications info:hdl:2441/2029nqlehl8, Sciences Po.
    6. 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.
    7. Blouri, Yashar & Ehrlich, Maximilian V., 2020. "On the optimal design of place-based policies: A structural evaluation of EU regional transfers," Journal of International Economics, Elsevier, vol. 125(C).
    8. Baughman, Garth & Rabinovich, Stanislav, 2019. "Self-confirming price dispersion in monetary economies," Journal of Economic Theory, Elsevier, vol. 183(C), pages 284-311.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. Rincón-Zapatero, Juan Pablo & Jerez, Belén & Díaz, Antonia, 2019. "Housing Prices and Credit Constraints in Competitive Search," UC3M Working papers. Economics 28874, Universidad Carlos III de Madrid. Departamento de Economía.
    14. Chao Gu & Randall Wright, 2016. "Monetary Mechanisms," Working Papers 1601, Department of Economics, University of Missouri.
    15. Enders, Zeno, 2010. "Heterogeneous consumers, segmented asset markets, and the effects of monetary policy," Bonn Econ Discussion Papers 08/2010, University of Bonn, Bonn Graduate School of Economics (BGSE).
    16. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.
    17. Jonathan Chiu & Miguel Molico, . "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    18. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.
    19. Pablo Ottonello, 2015. "Capital Unemployment, Financial Shocks, and Investment Slumps," 2015 Meeting Papers 1153, Society for Economic Dynamics.
    20. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2017. "A new suggestion for simplifying the theory of money," Journal of Economic Theory, Elsevier, vol. 172(C), pages 423-450.
    21. Jonathan Chiu & Miguel Molico, . "Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    22. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    23. Mahmoudi, Babak, 2013. "Open-Market Operations, Asset Distributions, and Endogenous Market Segmentation," MPRA Paper 50089, University Library of Munich, Germany.

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    More about this item

    JEL classification:

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

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