Money, capital, and redistributive effects of monetary policies

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Abstract

This paper examines the redistributive role of expansionary monetary policies. For this purpose a physical environment with heterogeneous agents is described to emphasize two frictions. One is a within-market friction that agents cannot borrow within each market; the other is a cross-market friction that agents cannot borrow across markets. Although a contractionary monetary policy is required to eliminate the within-market friction, as in many previous monetary models, an expansionary monetary policy is required to eliminate the cross-market friction. When both frictions are operational, no monetary policy alone can restore efficiency and the second-best monetary policy requires the money growth rate to exceed the Friedman rule. The first-best allocation can be achieved by a combination of fiscal policies and the Friedman rule.

Original languageEnglish (US)
Pages (from-to)565-590
Number of pages26
JournalJournal of Economic Dynamics and Control
Volume23
Issue number4
DOIs
StatePublished - Feb 24 1999

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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