Working through the Distribution: Money in the Short and Long Run
We construct a tractable model of monetary exchange with search and bargaining that features a non- degenerate distribution of money holdings in which one can study the short-run and long-run effects of changes in the money supply. While money is neutral in the long run, a one-time money injection in a centralized market with flexible prices generates an increase in aggregate real balances in the short run, a decrease in the rate of return of money, and a redistribution of consumption levels across agents. The price level in the short run varies in a non-monotonic fashion with the size of the money injection, e.g., small injections can lead to short-run deflation while large injections generate inflation. We extend our model to include employment risk and show that repeated money injections can raise output and welfare when unemployment is high.
Document Object Identifier (DOI): 10.3386/w21779
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