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Commodity Money with Frequent Search

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  • Ezra Oberfield

    (Federal Reserve Bank of Chicago)

  • Nicholas Trachter

    (EIEF)

Abstract

A prominent feature of the Kiyotaki and Wright (1989) model of commodity money is the multiplicity of dynamic equilibria. We show that the frequency of search is strongly related to the extent of multiplicity. To isolate the role of frequency of search in generating multiplicity, we (i) vary the frequency of search without changing the frequency of finding a trading partner and (ii) focus on symmetric dynamic equilibria, a class for which we can sharply characterize several features of the set of equilibria. For any finite frequency of search this class retains much of the multiplicity. For each frequency we characterize the full set of equilibrium payoffs, strategies played, and dynamic paths of the state variables. Indexed by any of these features, the set of equilibria converges uniformly to a unique equilibrium in the continuous search limit. We conclude that when search is frequent, the seemingly exotic dynamics are irrelevant.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1023.

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Length: 39 pages
Date of creation: 2010
Date of revision: Nov 2010
Handle: RePEc:eie:wpaper:1023

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  1. Timothy J. Kehoe & Nobuhiro Kiyotaki & Randall Wright, 1991. "More on money as a medium of exchange," Staff Report, Federal Reserve Bank of Minneapolis 140, Federal Reserve Bank of Minneapolis.
  2. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  3. Aiyagari, S Rao & Wallace, Neil, 1992. "Fiat Money in the Kiyotaki-Wright Model," Economic Theory, Springer, Springer, vol. 2(4), pages 447-64, October.
  4. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 441-63, August.
  5. Renero, Juan-Manuel, 1999. "Does and Should a Commodity Medium of Exchange Have Relatively Low Storage Costs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 251-64, May.
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