Monetary Policy and Debt Holder Heterogeneity

I evaluate the long-run effects of monetary policy in an incomplete market economy on welfare and endogenous distributions. Agents face continuous earnings heterogeneity that is calibrated to match the empirically observed earnings inequality in the US of the year 2007. Agents partially self-insure against idiosyncratic risks via precautionary savings in money and nominal bonds, where money is kept from a transaction motive. The continuous structure can explain for the concentration of private debt in higher parts of the earnings distribution and, thus, a mismatch between the bottom of the bond distribution and the bottoms of the earnings and welfare distribution. In the absence of lump-sum transfers, I compute equilibria in which seigniorage revenues are either redistributed via tax reduction or used to sustain a higher steady state level of public debt. My results imply that the mismatch between these two lower tails can be important in assessing the welfare implications of monetary policy.