Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own. We show that money – under efficient monetary policy – is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient “money cycle” patterns of saving, activity, and inactivity.
We present a general equilibrium model of money with bank deposits and credit. Banks have two roles: first they act as safe-keepers of agents’ values, second they act as transaction operators because they are able to identify agents. We show that there exists an equilibrium where money co-exists with bank deposits although interest rates payed on deposits are positive. Further, we compare our model to the basic framework where banks only act as safe-keepers and are not allowed to issue loans.
We study alternative institutional arrangements for the determination of
monetary policy in a general equilibrium model with heterogeneous agents,
where monetary policy has redistributive effects. Inflation is determined by a
policy board using either simple-majority voting, supermajority voting, or
bargaining. We compare the equilibrium inflation rates to the first-best