Working Paper: NBER ID: w21779
Authors: Guillaume Rocheteau; Pierre-Olivier Weill; Tsung-Ang Wong
Abstract: 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.
Keywords: monetary policy; money supply; search and bargaining; inflation; employment risk
JEL Codes: E0; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| one-time money injection (E65) | increase in aggregate real balances (E19) |
| one-time money injection (E65) | decrease in the rate of return on money (E49) |
| one-time money injection (E65) | redistribution of consumption levels across agents (F62) |
| size of money injection (E51) | price level (E30) |
| employment risk + repeated money injections (J63) | enhance output (E23) |
| employment risk + repeated money injections (J63) | enhance welfare (I30) |