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Money in Bilateral Trade

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  • Aleksander Berentsen
  • Guillaume Rocheteau

Abstract

In this paper we compare production inefficiencies in bilateral meetings generated by two types of trading frictions: double-coincidence frictions and information frictions. For both types of frictions, money enlarges the sets of incentive-feasible allocations relative to barter. In environments with double-coincidence frictions, the first-best allocation is incentive-feasible if the real stock of money is sufficiently high. In contrast, in environements with information frictions, the first-best allocation is never incentivefeasible regardless of the real stock of money. These results highlight a fundamental difference between these two types of frictions. While money can eliminate the production inefficiencies that arise in bilateral meetings with a double-coincidence problem, it can only ameliorate but not eliminate the inefficiencies that are due to private information.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 138 (2002)
Issue (Month): IV (December)
Pages: 489-506

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Handle: RePEc:ses:arsjes:2002-iv-10

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Related research

Keywords: Money; double-coincidence problem; private information; search; mechanism design;

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References

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  1. Aleksander Berentsen & Guillaume Rocheteau, 2003. "Money and the Gains from Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 263-297, February.
  2. Shouyong Shi, 2001. "Liquidity, Bargaining, and Multiple Equilibria in a Search Monetary Model," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 325-351, November.
  3. Aleksander Berentsen & Guillaume Rocheteau, 2003. "On the Friedman Rule in Search Models with Divisible Money," The B.E. Journal of Macroeconomics, De Gruyter, vol. 0(1), pages 11.
  4. Aleksander Berentsen, 2002. "On the Distribution of Money Holdings in a Random-Matching Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 945-954, August.
  5. Taber, Alexander & Wallace, Neil, 1999. "A Matching Model with Bounded Holdings of Indivisible Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 961-84, November.
  6. Berentsen, Aleksander & Molico, Miguel & Wright, Randall, 2002. "Indivisibilities, Lotteries, and Monetary Exchange," Journal of Economic Theory, Elsevier, vol. 107(1), pages 70-94, November.
  7. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  8. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
  9. Aleksander Berentsen & Guillaume Rocheteau, . "On the Efficiency of Monetary Exchange:How Divisibility of Money Matters," IEW - Working Papers 101, Institute for Empirical Research in Economics - University of Zurich.
  10. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, . "Friedman Meets Hosios: Efficiency in Search Models of Money," IEW - Working Papers 154, Institute for Empirical Research in Economics - University of Zurich.
  11. Dean Corbae & Ted Temzelides & Randall Wright, 2002. "Matching and Money," American Economic Review, American Economic Association, vol. 92(2), pages 67-71, May.
  12. Aleksander Berentsen & Guillaume Rocheteau, . "Money and Information," IEW - Working Papers 099, Institute for Empirical Research in Economics - University of Zurich.
  13. Lotz, Sebastien & Rocheteau, Guillaume, 2002. "On the Launching of a New Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 563-88, August.
  14. Alexei Deviatov & Neil Wallace, 2001. "Another Example in which Lump-sum Money Creation is Beneficial," The B.E. Journal of Macroeconomics, De Gruyter, vol. 0(1), pages 1.
  15. Edward J. Green & Ruilin Zhou, 1996. "A Rudimentary Random-Matching Model with Divisible Money and Prices," GE, Growth, Math methods 9606001, EconWPA, revised 25 Jul 1996.
  16. Camera, Gabriele & Corbae, Dean, 1999. "Money and Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 985-1008, November.
  17. Berentsen, Aleksander, 2000. "Money Inventories in Search Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 168-78, May.
  18. King, Robert G. & Plosser, Charles I., 1986. "Money as the mechanism of exchange," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 93-115, January.
  19. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
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Cited by:
  1. Guillaume Rocheteau, 2011. "The cost of inflation: a mechanism design approach," Working Paper 1103, Federal Reserve Bank of Cleveland.

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