Convergence to monetary equilibrium: computational simulation of a trading post economy with transaction costs
In the classic Arrow-Debreu model, the existence of money is not accommodated. However, using trading post market segmentation and requiring budget balance in each pair-wise transaction the model can converge to monetary equilibrium. Uniqueness of the common medium of exchange (commodity money) follows from scale economy in transaction costs. Also, this paper shows that existence and convergence to monetary equilibrium are totally different concept. In Full Double Coincidence of Wants situation, where previous market information helps households judging which good has highest saleableness, convergence takes place more easily than in Absence of Double Coincidence of Wants situation. This paper investigates the emergence of commodity money as the result of a tatonnement adjustment in a trading post economy. The convergence process models Mengerâ€Ÿs concept of saleableness â€“ the most liquid good becomes the common medium of exchange. A computational approach is adopted to illustrate the monetary convergence as a result of decentralized adjustment process by utility maximizing households in the economy. Starting from an arbitrary initial economy, the analysis constructs a mapping from a compact economy space to monetary equilibrium or non-monetary equilibrium. By varying the transaction costs parameters and the household endowments, the paper successfully identifies the regions of parameter space where convergence to monetary equilibrium occurs as a result of decentralized adjustment process. The reasons for non-convergence are also investigated.
|Date of creation:||20 Oct 2010|
|Contact details of provider:|| Postal: 9500 Gilman Drive, La Jolla, CA 92093-0508|
Phone: (858) 534-3383
Fax: (858) 534-7040
Web page: http://www.escholarship.org/repec/ucsdecon/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:cdl:ucsdec:qt7br348nj. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.