Seigniorage Channel and Monetary Effectiveness in Flexible Price Economy

Replacing government lump-sum transfers in the household budget by the seigniorage channel in a modified RBC economy, this paper finds that the monetary shocks can impact the real economy effectively in the Neoclassical flexible price condition. The mechanism of the effectiveness is the resource reallocation triggered by monetary shocks. There are three outstanding characteristics of the seigniorage channeled monetary economy - integrality, interactive pricing, and Pareto optimality of the unique equilibrium - all of which are found to be incompatible with the existing dynamic general equilibrium monetary economics. Many vexing issues in macroeconomics are clarified through the lens of the seigniorage channeled monetary economy, including the price puzzle, missing of the liquidity effect, cause of the hump in the impulse-response curves, nonneutrality of growth rate of money and inflation, origin of the money market interest rate, choosing of reactive monetary policy rule, and negative movement of hours under a positive technology shock. The simulation shows that the seigniorage channeled monetary economy matches the empirical results in the literature well