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Pairwise trade, asset prices, and monetary policy

  • Nosal, Ed
  • Rocheteau, Guillaume

We construct a search-theoretic model where fiat money coexists with real assets, and all assets can be used as a media of exchange. The terms of trade in bilateral matches are determined by a pairwise Pareto-efficient pricing mechanism. We do not have to appeal to exogenous liquidity constraints to generate asset prices that are consistent with the following facts: (i) fiat money can be valued despite being dominated in its rate of return; (ii) real assets with identical dividend flows can have different rates of return; and (iii) an increase in inflation raises asset prices, lowers their returns, and widens the rate-of-return differences between assets. On the normative side we show that there is a range of inflation rates that implement the first-best allocation.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 1-17

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:1-17
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  18. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  19. Pierre-Olivier Weill, 2004. "Liquidity Premia in Dynamic Bargaining Markets," Econometric Society 2004 North American Winter Meetings 648, Econometric Society.
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