Date of Completion

5-9-2014

Embargo Period

5-9-2014

Keywords

money, distribution, search, bargaining, inflation, welfare, inequality

Major Advisor

Christian Zimmermann

Associate Advisor

Ricardo Lagos

Associate Advisor

Miguel Molico

Associate Advisor

Richard Suen

Field of Study

Economics

Degree

Doctor of Philosophy

Open Access

Open Access

Abstract

This thesis presents three related models to examine the welfare and wealth distributional effects in a monetary search model with non-degenerate distribution of money. The first chapter presents a procedure for solving an extension of Molico's (2006) model that relaxes the assumption of full bargaining power to buyers. The procedure is used to investigate the effects of a change in the buyer's bargaining power when money supply is fixed. The results suggest that when the buyer's bargaining power is very high, decreasing it increases the average welfare while the opposite is true when it is relatively low. The results also suggest that wealth inequality increases when the bargaining weight of buyers decreases. The second chapter extends the environment of the first chapter to allow changes in the supply of money in order to investigate the effects of an expansionary monetary policy implemented through a lump-sum money transfer. The results show that an increase in the growth rate of money lowers wealth inequality when the bargaining power of the buyer is low or when it is high but the money growth rate is low. However, when the buyers have high bargaining power an increase in money supply can increase inequality at high money growth rates. An increase in money supply increases the average welfare when the money growth rate is low, but high money growth rates leads to a reduction in average welfare. The third chapter checks the robustness of the results of the second Chapter by allowing agents to meet other potential trading partners during the bargaining process, and also by computing the welfare cost of inflation as an additional welfare measure. The results indicate that expansionary monetary policies are not welfare improving. In particular the results show that an increase in money supply leads to a decrease in the average welfare and an increase in the welfare cost of inflation. However, money creation can reduce the wealth inequality when the money growth rate is high, although the opposite holds when the money growth rate is low.

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