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Divisible Money in an Economy with Villages

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  • Miquel Faig

Abstract

This paper provides a tractable search model with divisible money that encompasses the two frameworks currently used in the literature. In the model, individuals belong to many villages. Inside a village, individuals are not altruistic as in a representative household, but they share information so financial contracts are feasible. Money is essential in the model to facilitate trade with individuals outside the village. The framework proposed by Lagos and Wright (2002) arises as a special case if some goods trade in competitive markets while others trade in search markets, and preferences are quasi-linear. The framework proposed by Shi (1997) arises as a special case if individuals can insure trading risks inside the village. In general, if preferences are not quasi-linear and trading risks cannot be insured, the distribution of money holdings is non-degenerate and monetary transfers have distributional effects. However, neither quasi-linear preferences nor insurance of trading risks are necessary for tractability. Indeed, this paper advances a tractable benchmark with an endogenous frequency of shopping in which all buyers choose to carry the same amount of money even if preferences are not quasi-linear and trading risks cannot be insured

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 248.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:248

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Keywords: monetary search; divisible money;

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References

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  1. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers 219, Institute for Empirical Research in Economics - University of Zurich.
  2. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private money and reserve management in a random-matching model," Discussion Paper / Institute for Empirical Macroeconomics 128, Federal Reserve Bank of Minneapolis.
  3. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  4. Jin, Yi & Temzelides, Ted, 1998. "On the Local Interaction of Money and Credit," Working Papers 99-05, University of Iowa, Department of Economics.
  5. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  6. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
  7. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  8. Bernhard Rauch, 2000. "A Divisible Search Model of Fiat Money: A Comment," Econometrica, Econometric Society, vol. 68(1), pages 149-156, January.
  9. 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.
  10. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  11. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers 930, Queen's University, Department of Economics.
  12. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September.
  13. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  14. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  15. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
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Citations

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Cited by:
  1. Martin Menner, 2011. ""Gesell Tax" and Efficiency of Monetary Exchange," Working Papers. Serie AD 2011-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. Sun, Hongfei, 2007. "Banking, Inside Money and Outside Money," MPRA Paper 4504, University Library of Munich, Germany.
  3. Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics.
  4. Stephen D. Williamson & Randall Wright, 2010. "New Monetarist Economics: models," Staff Report 443, Federal Reserve Bank of Minneapolis.
  5. Miquel Faig & Belen Jerez, 2005. "Inflation, Prices, And Information In Competitive Search," Economics Working Papers we051708, Universidad Carlos III, Departamento de Economía.
  6. Miquel Faig & Belén Jerez, 2006. "Precautionary Balances and the Velocity of Circulation of Money," Working Papers tecipa-188, University of Toronto, Department of Economics.
  7. Rocheteau, Guillaume & Rupert, Peter & Shell, Karl & Wright, Randall, 2005. "General Equilibrium with Nonconvexities, Sunspots, and Money," Working Papers 05-16, Cornell University, Center for Analytic Economics.
  8. Menner Martin, 2006. "A Search-Theoretic Monetary Business Cycle Model with Capital Formation," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-36, November.
  9. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
  10. Martin Menner, 2006. "Monetary Propagation In Search-Theoretic Monetary Models," Economics Working Papers we066426, Universidad Carlos III, Departamento de Economía.

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