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On the Efficiency of Monetary Exchange : Why Divisibility of Money Matters

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  • Aleksander BERENTSEN
  • Guillaume ROCHETEAU

Abstract

Why is money divisible? To explore this question we introduce a mismatch problem into search-theoretic models of monetary exchange. We use alternative assumptions about the divisibility of goods and money and the ability of agents to use lotteries on money. Our framework potentially generates three types of inefficiencies: the no-trade inefficiency where no trade takes place even though it would be socially efficient to trade; the too-much-trade and too-little-trade inefficiencies where the quantities produced and exchanged are either larger or smaller than what the solution to a social planner's problem would dictate. It is shown that while the no-trade and the too-much-trade inefficiencies are caused by the indivisibility of money, the too-little-trade inefficiency is due to the impatience of the traders and the time-consuming exchange process. Furthermore, we find that the lottery model with indivisible money and divisible goods is qualitatively similar to the divisible money and divisible goods model.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 00.19.

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Length: 44 pages
Date of creation: Jul 2000
Date of revision:
Publication status: Published in Journal of Monetary Economics, vol.49 (8), Nov. 2002, pp. 1621-1649
Handle: RePEc:lau:crdeep:00.19

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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