Money Allocation, Unemployment, and Monetary Policy
40 Pages Posted: 28 Apr 2020
Date Written: March 15, 2020
Firms and consumers both hold significant amounts of money, and the firm share changes over time and is negatively correlated with inflation. While existing studies of monetary policy and unemployment only consider consumer money, we build a quantitative framework of money allocation between consumers and firms. The quantitative results show that incorporating firm money greatly amplifies the effect of monetary policy on unemployment, and that an increase in inflation reduces the firm money share. The positive spillover effect from consumer money to firm money proves quantitatively important in accounting for changes in firm money.
Keywords: firm money, money allocation, unemployment, monetary policy
JEL Classification: D83, E24, E41, E52, J64
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