Essays on monetary economies with heterogeneous agents

Paola Boel, Purdue University

Abstract

In Chapter 1 we construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with money and nominal government bonds, but all trades must be monetary. We demonstrate that a deflationary policy à la Friedman cannot sustain the constrained-efficient allocation as no-arbitrage imposes too stringent a bound on the return money can pay. The constrained-efficient allocation can be sustained when bonds have positive yields and, under certain conditions, only if they are illiquid. Illiquidity, meaning that bonds cannot be transformed into consumption as easily as cash; is necessary to eliminate arbitrage opportunities due to disparities in shadow interest rates. In Chapter 2 we present a monetary economy with an explicit role for fully divisible money, where agents hold cash to insure against consumption risk. We demonstrate that when agents differ in terms of preferences, productivity of labor or frequency of consumption shocks monetary policy can eliminate disparities in money holdings, and hence is capable to sustain efficiency. If instead agents are heterogeneous with respect to their time preferences, a deflationary policy fails to sustain the efficient allocation, although it is a second best. In Chapter 3 we construct a monetary economy where agents hold cash to insure against consumption risk. We calibrate the model to the U.S. economy and use it to quantify the welfare cost of inflation. At the aggregate level, we obtain estimates similar to previous representative agent models. However, when we look at the distributional effects of inflation, we find that positive inflation can in fact be welfare increasing for agents with low consumption risk.

Degree

Ph.D.

Advisors

Camera, Purdue University.

Subject Area

Economics

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