On the Distributional Effects of Monetary Shocks and Market Incompleteness

I study the transmission of distortionary monetary policy shocks under incomplete markets. Using a heterogeneous agents general equilibrium model, I demonstrate that there is a unique fundamental stationary equilibrium, where the distribution of monetary holdings mirrors productivity, but infinite non-fundamental stationary equilibria for a given monetary base in the presence of a frictionless bonds market. Only financially constrained economies return to the fundamental stationary equilibrium after an unforeseeable monetary shock that redistributes monetary holdings, with aggregate effects on output and endogenous price stickiness along the transition. In financially developed economies, distortions are smaller, and effects on aggregate variables are negligible, but monetary shocks create hysteresis by making the consequences of idiosyncratic shocks permanent. While partial market completion enhances welfare by enabling nearly perfect risk sharing, this improvement is limited by the irreversibility of the idiosyncratic shocks. Ultimately, distributional effects are irrelevant for monetary policy trans mission to aggregate variables in developed economies but critical in poorer countries.