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Money, Intermediaries and Cash-in-Advance Constraints

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  • Christian Hellwig

    (London School of Economics)

Abstract

I study a search economy in which intermediaries are the driving force co-ordinating the economy on the use of a unique, common medium of exchange for transactions. If search frictions delay trade, intermediaries offering immediate exchange opportunities can make arbitrage gains from a price spread. As these intermediaries take over transactions, they are confronted to the double coincidence problem of the search market. In the model presented here, intermediaries solve this problem best by imposing a common medium of exchange to other agents, such that a Cash-in-Advance constraint results: Agents trade twice in order to consume, once to exchange their production against the medium of exchange, and once to receive their consumption good. To select between multiple equilibria, I introduce a criterion of minimal coalition proofness, whereby arbitrarily small coalitions may induce a change from one equilibrium to another. I show that any minimally coalition-proof equilibrium is Pareto-efficient, and characterize the full set of minimally coalition-proof equilibria of this economy.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1631.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1631

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  1. S. Rao Aiyagari & Neil Wallace, 1991. "Existence of steady states with positive consumption in the Kiyotaki-Wright model," Working Papers 428, Federal Reserve Bank of Minneapolis.
  2. Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January.
  3. Peter Howitt, 2005. "Beyond Search: Fiat Money In Organized Exchange," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 405-429, 05.
  4. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
  6. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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Cited by:
  1. Blume, Lawrence E. & Easley, David & Kleinberg, Jon & Tardos, √Čva, 2009. "Trading networks with price-setting agents," Games and Economic Behavior, Elsevier, vol. 67(1), pages 36-50, September.
  2. Christian Hellwig, 2002. "Money, Intermediaries, and Cash-in-Advance Constraints (February 2003)," UCLA Economics Online Papers 207, UCLA Department of Economics.
  3. Starr, Ross M., 2001. "Why Is There Money? Endogenous Derivation of "Money" as the Most Liquid Asset: A Class of Examples," University of California at San Diego, Economics Working Paper Series qt2rt3k4r7, Department of Economics, UC San Diego.
  4. Starr, Ross M., 2002. "Existence of Uniqueness of "Money" in General Equilibrium: Natural Monopoly in the Most Liquid Asset," University of California at San Diego, Economics Working Paper Series qt660465rm, Department of Economics, UC San Diego.
  5. Starr, Ross M., 2000. "Why is there Money? Endogenous Derivation of "Money" as the Most Liquid Asset: A Class of Examples," University of California at San Diego, Economics Working Paper Series qt9bm927sh, Department of Economics, UC San Diego.
  6. Starr, Ross M., 2003. "Monetary general equilibrium with transaction costs," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 335-354, June.

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