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A Search Theory of Money and Commerce with Neoclassical Production

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  • Miquel Faig

Abstract

This paper advances a highly tractable model with search theoretic foundations for money and neoclassical growth. In the model, manufacturing and commerce are distinct and separate activities. In manufacturing, goods are efficiently produced combining capital and labor. In commerce, goods are exchanged in bilateral meetings. The model is applied to study the effects of in ation on capital accumulation and welfare. With realistic parameters, in ation has large negative effects on welfare even though it raises capital and output. In contrast, with cash-in-advance, a device informally motivated with bilateral trading, in ation depresses capital and output and has a negligible effecton welfare. (Keywords: search, money, commerce, in ation, neoclassical production, capital accumulation, optimum quantity of money.)

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number faig-01-01.

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Length: 42 pages
Date of creation: 24 Jul 2001
Date of revision:
Handle: RePEc:tor:tecipa:faig-01-01

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Keywords: search; money; commerce; in; ation; neoclassical production; capital accumulation; optimum quantity of money.;

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References

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  1. Shouyong Shi, 1996. "A Divisible Search Model of Fiat Money," Working Papers, Queen's University, Department of Economics 930, Queen's University, Department of Economics.
  2. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers, UCLA Department of Economics 496, UCLA Department of Economics.
  3. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers, Queen's University, Department of Economics 916, Queen's University, Department of Economics.
  4. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 377-415, April.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  6. Michelle Alexopoulos, 2006. "Shirking in a monetary business cycle model," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 39(3), pages 689-718, August.
  7. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc.
  8. Camera, G., 1999. "Dirty Money," Purdue University Economics Working Papers 1124, Purdue University, Department of Economics.
  9. Ruilin Zhou, 1996. "Individual and aggregate real balances in a random matching model," Staff Report, Federal Reserve Bank of Minneapolis 222, Federal Reserve Bank of Minneapolis.
  10. Friedman, Milton, 1986. "The Resource Cost of Irredeemable Paper Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 642-47, June.
  11. Alvarez, Fernando & Stokey, Nancy L., 1998. "Dynamic Programming with Homogeneous Functions," Journal of Economic Theory, Elsevier, Elsevier, vol. 82(1), pages 167-189, September.
  12. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 63-77, March.
  13. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," 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. 47(3), pages 701-722, 08.
  14. Taber, Alexander & Wallace, Neil, 1999. "A Matching Model with Bounded Holdings of Indivisible Money," 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(4), pages 961-84, November.
  15. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," 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. 36(4), pages 927-42, November.
  16. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  17. Hornstein, Andreas, 1993. "Monopolistic competition, increasing returns to scale, and the importance of productivity shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(3), pages 299-316, June.
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Citations

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Cited by:
  1. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2004. "Friedman meets Hosios: efficiency in search models of money," Working Paper 0408, Federal Reserve Bank of Cleveland.
  2. Miquel Faig & Belen Jerez, 2003. "A Theory of Commerce: Competitive Search Under Private Information," Working Papers, University of Toronto, Department of Economics faig-02-01, University of Toronto, Department of Economics.
  3. S. Boragan Aruoba & Randall Wright, 2002. "Search, Money and Capital: A Neoclassical Dichotomy, Second Version," PIER Working Paper Archive 03-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2003.
  4. Curtis, Elisabeth & Wright, Randall, 2004. "Price setting, price dispersion, and the value of money: or, the law of two prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(8), pages 1599-1621, November.
  5. Martin Menner, 2005. "A Search-Theoretic Monetary Business Cycle Model With Capital Formation," Economics Working Papers we056634, Universidad Carlos III, Departamento de Economía.

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