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Money as a mechanism in a Bewley economy

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Edward J. Green
Ruilin Zhou

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Abstract

We study what features an economic environment might possess, such that it would be Pareto efficient for the exchange of goods in that environment to be conducted on spot markets where those goods trade for money. We prove a conjecture that is essentially due to Bewley [1980,1983]. Monetary spot trading is nearly efficient when there is only a single perishable good (or a composite commodity) at each date and state of the world; random shocks are idiosyncratic, privately observed, and temporary; markets are competitive; and the agents are very patient. This result is a fairly close analogue, for trade using outside, fiat money, of a recent characterization by Levine and Zame [2002] of environments in which spot trade using inside money, in the form of one-period debt payable in a commodity, is nearly Pareto efficient. We also study a example where expansionary monetary mechanism Pareto dominates laissez-faire or contractionary monetary mechanism in an environment with impatient agents.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-02-15.

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Date of creation: 2002
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Handle: RePEc:fip:fedhwp:wp-02-15

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Keywords: Money Monetary theory

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  1. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, UCLA Department of Economics. [Downloadable!]
  2. David K. Levine & William Zame, 2001. "Does Market Incompleteness Matter," Levine's Working Paper Archive 78, UCLA Department of Economics. [Downloadable!]
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  3. Alexei Deviatov & Neil Wallace, 2001. "Another Example in which Lump-sum Money Creation is Beneficial," Advances in Macroeconomics, Berkeley Electronic Press, vol. 1(advances/), pages 1001-1001. [Downloadable!] (restricted)
  4. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October. [Downloadable!] (restricted)
  5. Mas-Colell, Andreu & Vives, Xavier, 1993. "Implementation in Economies with a Continuum of Agents," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 613-29, July. [Downloadable!] (restricted)
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  6. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June. [Downloadable!] (restricted)
  7. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Blackwell Publishing, vol. 59(3), pages 427-53, July. [Downloadable!] (restricted)
  8. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December. [Downloadable!] (restricted)
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  9. Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis. [Downloadable!]
  10. Chris Edmond, 2002. "Self-Insurance, Social Insurance, and the Optimum Quantity of Money," American Economic Review, American Economic Association, vol. 92(2), pages 141-147, May. [Downloadable!] (restricted)
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  1. Bhattacharya, Joydeep & Haslag, Joseph & Martin, Antoine & Singh, Rajesh, 2004. "Who is Afraid of the Friedman Rule?," Staff General Research Papers 12213, Iowa State University, Department of Economics. [Downloadable!]
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  2. Narayana R. Kocherlakota, 2005. "Optimal monetary policy: what we know and what we don’t know," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Oct, pages 10-19. [Downloadable!]
    Other versions:
  3. Antonia Diaz & Fernando Perera-Tallo, 2007. "Credit and inflation under borrower’s lack of commitment," Economics Working Papers we077946, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  4. Antoine Martin & Cyril Monnet, 2008. "Monetary policy implementation frameworks: a comparative analysis," Staff Reports 313, Federal Reserve Bank of New York. [Downloadable!]
  5. Narayana R. Kocherlakota, 2007. "Money and bonds: an equivalence theorem," Staff Report 393, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "The Distribution of Money Balances and the Non-Neutrality of Money," IEW - Working Papers iewwp220, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  7. Sissoko, Carolyn, 2007. "An Idealized View of Financial Intermediation," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(5). [Downloadable!]
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  8. Shouyong Shi, 2006. "Search Theory; Current Perspectives," Working Papers tecipa-273, University of Toronto, Department of Economics. [Downloadable!]
  9. Miguel Molico & Yahong Zhang, 2006. "Monetary Policy and the Distribution of Money and Capital," Computing in Economics and Finance 2006 136, Society for Computational Economics. [Downloadable!]
  10. Joydeep Bhattacharya & Joseph H. Haslag & Antoine Martin, 2004. "Heterogeneity, redistribution, and the Friedman rule," Research Working Paper RWP 04-01, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  11. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics. [Downloadable!]
  12. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "Money, Credit and Banking," IEW - Working Papers iewwp219, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
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