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Working through the Distribution: Money in the Short and Long Run

Guillaume Rocheteau, Pierre-Olivier Weill, Tsz-Nga Wong

NBER Working Paper No. 21779
Issued in December 2015
NBER Program(s):The Economic Fluctuations and Growth Program, The Monetary Economics Program

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.

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Document Object Identifier (DOI): 10.3386/w21779

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