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A Monetary Theory with Non-degenerate Distributions

  • Guido Menzio
  • Shouyong Shi
  • Hongfei Sun

We construct and analyze a tractable search model of money with a non-degenerate distribution of money holdings. Analytical tractability comes from modeling decentralized exchange as directed search, which makes the monetary steady state block recursive. 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 and provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate. Moreover, we analyze the properties of this distribution.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-495.

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Date of creation: 17 Aug 2013
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Handle: RePEc:tor:tecipa:tecipa-495
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