Optimal monetary policy with heterogeneous money holdings

TitleOptimal monetary policy with heterogeneous money holdings
Publication TypeJournal Article
Year of Publication2015
AuthorsLippi, F, Ragni, S, Trachter, N
JournalJournal of Economic Theory
IssuePart A

We study the optimal anticipated policy in a pure-currency economy with flexible prices and a non-degenerate distribution of money holdings. The economy features a business cycle and lump-sum monetary injections have distributional effects that depend on the state of the cycle. We parsimoniously characterize the dynamics of the economy and study the optimal regulation of the money supply as a function of the state under commitment. The optimal policy prescribes monetary expansions in recessions, when insurance is most needed by the cash-poor unproductive agents. Conversely, the optimal policy prescribes monetary contractions during booms, so that the inflationary effect of the occasional expansions is undone.

Keywordsfriedman rule, heterogeneous agents, precautionary savings, pure currency, redistributive monetary policy