We show that modeling monetary circulation and cyclical activity offers insights about monetary policy that cannot be had in representative-agent models. Two fundamental ideas emerge: (i) the reflux of money back to the hands of those making current expenditures can be inefficient, and (ii) expansionary policy may accommodate more trade during high-demand seasons, at the expense of less trade in low-demand seasons and a less valuable currency. The paper provides a foundation for the optimality of a cyclical monetary policy.
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