Transitional dynamics in a monetary econom

This dissertation studies nonstationary transitional dynamics in a class of general equilibrium models with heterogeneous agents. Markets are incomplete in this class of models, and agents hold a fiat currency as insurance against idiosyncratic income fluctuations. A liquidity constraint is imposed which precludes analytical solution of the model, generating a need for numerical solution methods. Computational discrete state dynamic programming methods are employed to solve for the dynamic equilibrium response of an economy to unanticipated changes in the economic environment. Transitional dynamic analysis is applied to the analysis of both the short run and the long run effects of inflationary monetary policy. This analysis reveals that the short run effects of monetary policy have a dramatic impact on the welfare of consumers. It is shown that the transitional impact of inflationary monetary policy on social welfare exceeds previous steady state estimates of the welfare cost of inflation by 60% and more. Transitional dynamic analysis also allows a disaggregated analysis of the welfare effects of monetary policy. It is shown that the poorest agents in the economy benefit from moderate increases in the inflation rate while wealthier agents suffer under the burden of the inflation tax.