Money and risk of loss in an asset market segmentation model

A simple asset market segmentation model is constructed to study the relationship between inflation and theft when money is the only medium of exchange. In equilibrium, money is nonneutral and monetary policy has asymmetric effects on theft, real money holding, and consumption. The distributional effects persist over periods and the liquidity effect may arise. Next, given the asymmetric effects of monetary policy, the crime rates differ across economic individuals in order to smooth out consumption fluctuations. Given the conditions of stealing technology, monetary equilibrium would not be always sustainable. Finally, the optimal money growth rate is to minimize theft and the Friedman rule is suboptimal. (C) 2012 Elsevier Inc. All rights reserved.