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The Efficiency of Monetary Exchange in Search Equilibrium

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  • Li, Victor E
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    Abstract

    Search theoretic models of money emphasize monetary exchange as the outcome of economic environments characterized by bilateral trading frictions. This paper analyzes the efficiency of monetary exchange in a search model of fiat money where individuals invest costly effort in the exchange process. Because the optimal effort each individual trader invests in exchange is based upon the private rather than social gains from trade, decentralized monetary equilibria are shown to be inefficient relative to the social optimum. However, for an appropriate division of the gains from trade given to buyers and sellers, it is possible to attain social efficiency. The nature of these search externalities for monetary exchange and their implications for policy are evaluated and discussed. Copyright 1997 by Ohio State University Press.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 29 (1997)
    Issue (Month): 1 (February)
    Pages: 61-72

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    Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:1:p:61-72

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Huberto M. Ennis, 2005. "Avoiding the inflation tax," Working Paper 05-10, Federal Reserve Bank of Richmond.
    2. Marchesiani, Alessandro & Senesi, Pietro, 2007. "Money and Nominal Bonds," MPRA Paper 9417, University Library of Munich, Germany.
    3. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
    4. Guillaume Rocheteau & Randall Wright, 2003. "Inflation and Welfare in Models with Trading Frictions," PIER Working Paper Archive 03-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    5. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
    6. Arias, J.J., 2005. "Search and leisure with idiosyncratic endowment shocks in a random-matching model," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 385-402, September.
    7. Wilfredo Toledo, 2006. "El dinero en los modelos macroeconómicos," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 97-116, July-Dece.
    8. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.

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