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Long-Run and Short-Run Effects of Money Injections

Tsz-Nga Wong (), Pierre-Olivier Weill () and Guillaume Rocheteau
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Guillaume Rocheteau: University of California, Irvine

No 793, 2015 Meeting Papers from Society for Economic Dynamics

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, an unanticipated, one-time, money injections in a centralized market with flexible prices and unrestricted participation generates an increase in aggregate real balances and aggregate output, a decrease in the rate of return of money, and a redistribution of output and consumption levels across agents in the short run. Moreover, the initial impact on the price level is non-monotonic with the size of the money injection, e.g., small injections can lead to a deflation followed by inflation. We also study repeated money injections and show they can lead to higher output and higher welfare.

New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2015
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