A Monetary Theory With Non-Degenerate Distributions
Source: University of Pennsylvania
Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, the authors fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. They assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals' policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself.