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A new suggestion for simplifying the theory of money

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  • Burdett, Kenneth
  • Trejos, Alberto
  • Wright, Randall

Abstract

We propose a new search-theoretic model of monetary exchange with indivisible assets, based on price posting instead of bargaining, and incorporating noisy search. This yields some familiar results, plus a lot more. The model admits multiple steady states due to the self-referential nature of liquidity. It admits cyclic, chaotic and stochastic equilibria, and compared to bargaining versions, the dynamics are more general and have better microfoundations. It generates price dispersion, with interesting efficiency implications, plus sticky prices and rational inattention. Parametric examples yield closed-form solutions. Based on these results, we suggest this should become a benchmark model in monetary economics.

Suggested Citation

  • Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2017. "A new suggestion for simplifying the theory of money," Journal of Economic Theory, Elsevier, vol. 172(C), pages 423-450.
    • Handle: RePEc:eee:jetheo:v:172:y:2017:i:c:p:423-450
    DOI: 10.1016/j.jet.2017.09.006
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    Cited by:

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    2. Vyacheslav Arbuzov & Yu Awaya & Hiroki Fukai & Makoto Watanabe, 2024. "Endogenous Cycles in Collateralized Credit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 627-646, March.
    3. Chao He & Randall Wright, 2019. "On Complicated Dynamics in Simple Monetary Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(6), pages 1433-1453, September.
    4. Wei-Bin Zhang, 2020. "Inflation And Growth With The Miu Approach And The Equation Of Exchange," Social Sciences and Education Research Review, Department of Communication, Journalism and Education Sciences, University of Craiova, vol. 7(1), pages 45-71, July.
    5. Liang Wang & Randall Wright & Lucy Qian Liu, 2020. "Sticky Prices And Costly Credit," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 37-70, February.
    6. Kang, Kee-Youn, 2024. "Digital currency and privacy," Theoretical Economics, Econometric Society, vol. 19(1), January.

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    More about this item

    Keywords

    Money; Search; Dynamics; Dispersion;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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