Carlo Strub

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 allocation.

We study general dynamic programming problems with continuous and discrete choices and general constraints. The value functions may have kinks arising (1) at indifference points between discrete choices and (2) at constraint boundaries. Nevertheless, we establish a general envelope theorem: first-order conditions are necessary at interior optimal choices. We only assume differentiability of the utility function with respect to the continuous choices. The continuous choice may be from any Banach space and the discrete choice from any non-empty set.

It is well known that agents may smooth out non-convexities using lotteries. Can agents use time and money instead? We show that in a labor model with a fixed cost of working, workers perfectly smooth their consumption if they have access to money governed by the Friedman rule. Away from the Friedman rule, workers repeat their choices over money cycles of finite length. They begin cycles with no money and end cycles by spending all of their money on vacations. A hot-potato effect causes workers to front-load consumption to the start of each money cycle, which is an inefficient distortion away from perfect consumption smoothing.