Monetary Shocks in a Spatial Overlapping Generations Model

The paper combines a simple monetary overlapping generations model with a simple abstract spatial structure, to produce a model that focuses on the effect of the distribution of cash balances on real and nominal variables, both across the economy, and over time. The model is then used to study the effects of a monetary shock. The economy is endowed with a spatial structure in the form of a Cayley graph. Overlapping generations of two-period lived agents inhabit the vertices of the graph. Agents produce when young and consume when old. However, agents only consume the goods produced by their neighbours. All transactions are mediated by money. In her first period of life, a generic agent produces output and sells it to her old neighbours in exchange for cash; she then carries the newly acquired cash balances into her second period of life, and uses them to purchase consumption goods from her young neighbours. Therefore, money flows through the economy, traveling from one vertex to adjacent vertices as a consequence of production and exchange. The distribution of money across the economy determines relative prices which, in turn, determines the profile of production across the economy. Therefore any monetary shock that alters the distribution of money will also have an impact on both the distribution and the level of production.