A tractable model of monetary exchange with ex-post heterogeneity

We construct a continuous-time, pure-currency economy with elements from both Bewley (1980) and random-matching models. Households, who cannot commit and are unmonitored, receive infrequent and random opportunities of lumpy consumption. They insure themselves by accumulating real balances slowly over time. The equilibrium, which features an endogenous, nondegenerate distribution of money balances, is analytically tractable in a variety of cases and easily computed in general. The economy with linear value function and degenerate distribution of Lagos and Wright (2005) and Rocheteau and Wright (2005) is obtained at the limit when individual labor endowments tend to infinity. We use our modeled economy to obtain new insights for the social benefits of inflationary transfer schemes, the output effects of anticipated inflation, individual spending behavior in the presence of inflation, and transitional dynamics following unanticipated monetary shocks.

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