Search and Matching Approach In Monetary Theory: New Monetarism

Models in monetary economics literature mainly accept that money is valuable and take the quantity of money in the focus of interest but not the role of money as a medium of exchange. According to the New Monetarist Economics point of view, in order to make progress in monetary theory and policy analysis, explicit models that give rise to a role for fiat money as a medium of exchange - that shows how fiat money, which is an intrinsically valueless asset, the role as a medium of exchange – need to be established. To achieve this, the exchange process in decentralized markets and what happens during the agents’ utility maximization process should be modeled. The most convenient instrument to internalize and model the role of money as a medium of exchange is search and matching approach which is a game-theoretic method that takes microfoundations in the exchange process into account. In this study a class of basic search and matching models used in modeling the exchange process and the role of money as medium of exchange in particular are examined and the main ideas about the subject are conveyed.