Monetary Policy and the Distribution of Money Capital

Existing search-theoretical models of money have in general abstracted from the existence and accumulation of other assets, in particular, capital. In this paper we present a model where the optimal portfolio allocation decision of agents is explicitly modeled. Trade frictions in a decentralized consumption goods market give rise to an endogenous role for money. Capi-tal goods are assumed to be type-specific and traded in a centralized market. Uninsurable idiosyncratic uncertainty in production and trading opportuni-ties leads to a non-degenerate distribution of wealth. By focusing on sta-tionary equilibria we characterize numerically the wealth distribution and its composition. We further analyze the effects of monetary policy on the equilibrium patterns of exchange, the distribution of wealth, capital accu-mulation, and welfare. In particular, we show that a moderate expansionary policy, accomplished via lump-sum transfers, can lead to a steady-state in-crease in aggregate output, aggregate consumption, capital accumulation, and welfare. JEL Classification: E40, E5