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The Mechanism-Design Approach to Monetary Theory

In: Handbook of Monetary Economics

Author

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  • Wallace, Neil

Abstract

The mechanism-design approach to monetary theory is the search for fruitful settings in which money is necessary for the achievement of some desirable allocations. Fruitfulness means that the settings provide insights about puzzling observations and policy questions. Settings with three frictions are considered: imperfect monitoring, costly connections among people, and imperfect recognizability of assets. An illustrative model with those frictions is used to explain as an optimum the following features of actual economies: currency is a uniform object, currency is (usually) dominated in rate of return, some transactions are accomplished using currency and others are accomplished in other ways.

Suggested Citation

  • Wallace, Neil, 2010. "The Mechanism-Design Approach to Monetary Theory," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 1, pages 3-23, Elsevier.
    • Handle: RePEc:eee:monchp:3-01
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    Citations

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    Cited by:

    1. Zachary Bethune & Tai-Wei Hu & Guillaume Rocheteau, 2018. "Optimal Credit Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 231-245, January.
    2. Alexei Deviatov & Neil Wallace, 2010. "Interest on Cash with Endogenous Fiscal Policy," Working Papers 2010-012, Becker Friedman Institute for Research In Economics.
    3. Hu, Tai-Wei & Rocheteau, Guillaume, 2013. "On the coexistence of money and higher-return assets and its social role," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2520-2560.
    4. Jung, Kuk Mo & Lee, Seungduck, 2015. "A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle," MPRA Paper 64164, University Library of Munich, Germany.
    5. Chao Gu & Fabrizio Mattesini & Randall Wright, 2016. "Money and Credit Redux," Econometrica, Econometric Society, vol. 84, pages 1-32, January.
    6. Seungduck Lee & Kuk Mo Jung, 2020. "A Liquidity‐Based Resolution of the Uncovered Interest Parity Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1397-1433, September.
    7. Krishna, R. Vijay & Leukhina, Oksana, 2019. "On the benefits of currency reform," Journal of Economic Dynamics and Control, Elsevier, vol. 102(C), pages 81-95.
    8. Kiyotaki, Nobuhiro & Lagos, Ricardo & Wright, Randall, 2016. "Introduction to the symposium issue on money and liquidity," Journal of Economic Theory, Elsevier, vol. 164(C), pages 1-9.
    9. Rocheteau, Guillaume, 2012. "The cost of inflation: A mechanism design approach," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1261-1279.
    10. Shao, Enchuan, 2014. "The threat of counterfeiting in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 168-185.
    11. Trejos, Alberto & Wright, Randall, 2016. "Search-based models of money and finance: An integrated approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 10-31.
    12. Araujo, Luis & Hu, Tai-Wei, 2018. "Optimal monetary interventions in credit markets," Journal of Economic Theory, Elsevier, vol. 178(C), pages 455-487.
    13. Kenneth Burdett & Mei Dong & Ling Sun & Randall Wright, 2016. "Marriage, Markets, And Money: A Coasian Theory Of Household Formation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(2), pages 337-368, May.
    14. Wataru Nozawa & Hoonsik Yang, 2018. "Optimal Inflation in a Model of Inside Money: a Further Result," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 137-150, May.
    15. Kircher, Philipp & Wright, Randall & Julien, Benoit & Guerrieri, Veronica, 2017. "Directed Search: A Guided Tour," CEPR Discussion Papers 12315, C.E.P.R. Discussion Papers.
    16. Seon Tae Kim & Alessandro Marchesiani, 2020. "Market Intelligence Gathering and Money Demand," Working Papers 202004, University of Liverpool, Department of Economics.
    17. Hull, Isaiah & Sattath, Or, 2021. "Revisiting the Properties of Money," Working Paper Series 406, Sveriges Riksbank (Central Bank of Sweden).
    18. Mihaela Schaar & Jie Xu & William Zame, 2013. "Efficient online exchange via fiat money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(2), pages 211-248, October.
    19. Choi, Michael, 2018. "Imperfect information transmission and adverse selection in asset markets," Journal of Economic Theory, Elsevier, vol. 176(C), pages 619-649.
    20. Liang Wang, 2011. "Inflation and Welfare with Search and Price Dispersion," Working Papers 201113, University of Hawaii at Manoa, Department of Economics.
    21. Janet Hua (duplicate record) Jiang & Peter Norman & Daniela Puzzello & Bruno Sultanum & Randall Wright, 2021. "Is Money Essential? An Experimental Approach," Working Paper 21-12, Federal Reserve Bank of Richmond.
    22. Gu, Chao & Monnet, Cyril & Nosal, Ed & Wright, Randall, 2023. "Diamond–Dybvig and beyond: On the instability of banking," European Economic Review, Elsevier, vol. 154(C).
    23. Ed Nosal & Yuet‐Yee Wong & Randall Wright, 2015. "More on Middlemen: Equilibrium Entry and Efficiency in Intermediated Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 7-37, June.
    24. Eduardo Ferraciolli & Tanya Araújo, 2023. "Agent-based Modeling and the Sociology of Money: a Framework for the Study of Coordination and Plurality," Working Papers REM 2023/0285, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    25. Jonathan Chiu & Tsz-Nga Wong, 2015. "On the Essentiality of E-Money," Staff Working Papers 15-43, Bank of Canada.

    More about this item

    Keywords

    Money; Frictions; Inside-money; Mechanism-design; Monetary and Fiscal policy; Outside-money;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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