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Liquidity Constrained Competing Auctions

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  • Richard Dutu
  • Benoit Julien
  • Ian King

Abstract

When goods are sold through competing auctions, what e¤ect does monetary policy have on the equilibrium allocation? To answer, we extend the competing auctions framework in several ways: buyers choose how much money they bring to an auction, the quantities traded at the auctions are endogenous, and sellers can charge a fee (either positive or negative) to buyers participating in their auction. We present two di¤erent speci?cations of the model. In the ?rst model, sellers post a quantity they wish to sell and a fee, and allow the price to be determined by an auction. In the second model, sellers post a price and a fee and allow the quantity sold to be determined by an auction. When sellers post a quantity and buyers bid prices, the Friedman rule implements the ?rst best and, in this case, no fee is charged by sellers. Sellers charge buyers a participation fee as soon as the nominal interest rate is positive, and marginal increments in money growth decrease both the posted quantity and buyers?entry. The use of auction fees reduces welfare in this environment. When sellers post a price and buyers bid quantities, the Friedman rule is optimal but does not yield the ?rst best as agents trade an ine¢ ciently low quantity in multilateral matches and an ine¢ ciently high quantity in pairwise matches. Marginal increments in money growth decrease the posted real price and the quantities traded. When the interest rate is low, sellers pay buyers who participate in their auction, which increases welfare. When the interest rate is high, sellers charge buyers who participate in their auction, which reduces welfare.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1068.

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Length: 47 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mlb:wpaper:1068

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Keywords: Competing auctions; money; search; in?ation; auction fees;

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References

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Citations

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Cited by:
  1. Venky Venkateswaran & Randall Wright, 2013. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Working Papers 19009, National Bureau of Economic Research, Inc.
  2. Manolis Galenianos & Philipp Kircher, 2008. "A model of money with multilateral matching," LSE Research Online Documents on Economics 29701, London School of Economics and Political Science, LSE Library.
  3. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  4. Galenianos, Manolis & Kircher, Philipp, 2008. "A model of money with multilateral matching," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1054-1066, September.

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