Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/67843
Authors: 
Menzio, Guido
Shi, Shouyong
Sun, Hongfei
Year of Publication: 
2011
Series/Report no.: 
Queen's Economics Department Working Paper 1264
Abstract: 
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, we fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. We 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. Block recursivity enables us to characterize the equilibrium analytically. By adapting lattice-theoretic techniques, we characterize individuals' policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate and analyze the properties of this distribution.
Subjects: 
Distribution
Search
Lattice-Theoretic
JEL: 
E0
E4
C6
Document Type: 
Working Paper

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