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Money in Bilateral Trade

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Author Info
Aleksander Berentsen
Guillaume Rocheteau

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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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Publisher 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;

Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
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  1. 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.
  2. Alexei Deviatov & Neil Wallace, 2001. "Another Example in which Lump-sum Money Creation is Beneficial," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. Green, Edward J. & Zhou, Ruilin, 1998. "A Rudimentary Random-Matching Model with Divisible Money and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 252-271, August. [Downloadable!] (restricted)
    Other versions:
  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, 2000. "Money Inventories in Search Equilibrium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 168-78, May.
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  7. Berentsen, Aleksander & Molico, Miguel & Wright, Randall, 2002. "Indivisibilities, Lotteries, and Monetary Exchange," Journal of Economic Theory, Elsevier, vol. 107(1), pages 70-94, November. [Downloadable!] (restricted)
  8. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland. [Downloadable!]
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  9. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
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  10. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
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  11. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2007. "Friedman Meets Hosios: Efficiency in Search Models of Money," Economic Journal, Royal Economic Society, vol. 117(516), pages 174-195, 01. [Downloadable!] (restricted)
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  12. Berentsen, Aleksander & Rocheteau, Guillaume, 2002. "On the efficiency of monetary exchange: how divisibility of money matters," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1621-1649, November. [Downloadable!] (restricted)
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  13. Aleksander Berentsen & Guillaume Rocheteau, . "Money and the Gains from Trade," IEW - Working Papers iewwp100, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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    • 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. [Downloadable!] (restricted)
  14. Dean Corbae & Ted Temzelides & Randall Wright, 2002. "Matching and Money," American Economic Review, American Economic Association, vol. 92(2), pages 67-71, May. [Downloadable!]
  15. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Blackwell Publishing, vol. 71(4), pages 915-944, October. [Downloadable!] (restricted)
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  16. 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. [Downloadable!] (restricted)
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