Productivity , Credit Constraints and Monetary Policy ∗ ( preliminary draft )

We develop a model with money and credit where agents have different productivity to study credit and allocation. We show the link between the credit rationing, productivity and monetary policy, and study the distributional effects of monetary policy on the credit constraints, money holdings, and the ability to trade across agents. An agent’s productivity reflects his ability to replenish the money holdings and the ability to repay loans. We find that agents with low productivity consume less, produce more, and have less gains from trade in the good market. The cost of being excluded from the banking system is small for agents with low productivity, so banks offer less credit to agents with low productivity when credit rationing occurs. The monetary policy does not affect the effectiveness of credit arrangement in an equilibrium with unconstrained credit. In an equilibrium with constrained credit, inflation has different effects across heterogeneous agents. The borrowing constraints of agents with high productivity is relaxed more than those with low productivity. Hence, while inflation increases, the welfare of agents with high productivity is also higher.