Monetary policy, liquidity, and consumption inequality : a comment on Williamson (2012)

The article shows that expansionary open-market operations are non-neutral, even with price flexibility, when the purchased assets are partially liquid. A permanent injection of money generates a realbalance effect that helps monetary transactions, reduces consumption inequality and, by this way, increases social welfare. The mechanism is effective when the economy is trapped in a stationary equilibrium with an abundant supply of high-yield assets, which also implies extreme consumption inequality - as at the sunrise of the Great Recession. Improving on this equilibrium requires the asset purchases by the central bank or, equivalently, a fall in the supply of partially-liquid assets, which reduce consumption inequality - as observed during the Great Recession. To establish the result, I borrow the Williamson (2012)'s model and return it back with a financial contract that efficiently insures individuals against their uncertain demands for liquidity. Compared to the original contract, the new arrangement enlarges the Pareto frontier to allocations with higher social welfare.