A New Suggestion for Simplifying the Theory of Money
We propose a new search-theoretic model of monetary exchange with indivisible assets, based on price posting instead of bargaining, and incorporating noisy search. This yields some familiar results, plus a lot more. The model admits multiple steady states due to the self-referential nature of liquidity. It admits cyclic, chaotic and stochastic equilibria, and compared to bargaining versions, the dynamics are more general and have better microfoundations. It generates price dispersion, with interesting efficiency implications, plus sticky prices and rational inattention. Parametric examples yield closed-form solutions. Based on these results, we suggest this should become a benchmark model in monetary economics.
|Keywords||Money, Search, Dynamics, Dispersion|
|Journal||Journal of Economic Theory|
Trejos, A, Burdett, K., & Wright, R. (2017). A New Suggestion for Simplifying the Theory of Money. Journal of Economic Theory, 172, 423–450. doi:10.1016/j.jet.2017.09.006