A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity

Rocheteau, Guillaume; Weill, Pierre-Olivier; Wong, Russell

Working Paper

A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity

Abstract: We construct a continuous-time, New-Monetarist economy with general preferences that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of liquidity-trap equilibria and policy mix in terms of \"helicopter drops\" and open-market operations.

Keywords: money; inflation; risk sharing; liquidity traps;

JEL Classification: E40; E50;