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Optimal intervention in a random‐matching model of money

Wataru Nozawa and Hoonsik Yang

Bulletin of Economic Research, 2021, vol. 73, issue 4, 721-735

Abstract: We numerically find optimal transfer scheme in the Shi–Trejos–Wright model with extended upper bounds on money holdings. The choice of upper bound matters for the optimal policy as some potentially beneficial transfer schemes cannot be studied under small upper bounds. Money creation (and accompanying inflation) becomes optimal in more examples when the upper bound on money holdings is larger, and the type of optimal transfer depends on the parameters in utility function. This result is in line with the conjecture of Wallace, which says that there generically exists an inflation‐financed transfer scheme that improves welfare over no intervention in pure‐currency economies.

Date: 2021
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