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Long-Run and Short-Run Effects of Money Injections

Author

Listed:
  • Tsz-Nga Wong

    (Bank of Canada)

  • Pierre-Olivier Weill

    (UCLA)

  • Guillaume Rocheteau

    (University of California, Irvine)

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.

Suggested Citation

  • Tsz-Nga Wong & Pierre-Olivier Weill & Guillaume Rocheteau, 2015. "Long-Run and Short-Run Effects of Money Injections," 2015 Meeting Papers 793, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:793
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    References listed on IDEAS

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    Cited by:

    1. Rocheteau, Guillaume & Weill, Pierre-Olivier & Wong, Russell, 2018. "A tractable model of monetary exchange with ex-post heterogeneity," Theoretical Economics, Econometric Society, vol. 13(3), September.
    2. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2017. "A new suggestion for simplifying the theory of money," Journal of Economic Theory, Elsevier, vol. 172(C), pages 423-450.
    3. Athanasios Geromichalos & Kuk Mo Jung, 2019. "Monetary policy and efficiency in over-the-counter financial trade," Canadian Journal of Economics, Canadian Economics Association, vol. 52(4), pages 1699-1754, November.
    4. Geromichalos, Athanasios & Jung, Kuk Mo, 2024. "Heterogeneous asset valuation in OTC markets and optimal inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 161(C).
    5. Gu, Chao & Wright, Randall, 2016. "Monetary mechanisms," Journal of Economic Theory, Elsevier, vol. 163(C), pages 644-657.

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