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Liquidity, Bargaining, and Multiple Equilibria in a Search Monetary Model

Listed author(s):
  • Shouyong Shi


    (Department of Economics, Indiana University)

In this paper I construct a search monetary model with capital accumulation where money and goods are both divisible. Agents in matches determine the terms of trade through a sequential bargaining process and they face trading restrictions that require the quantity of money traded not to exceed what the buyer brings into the match. I show that sellers¡¯ share of the match surplus decreases with the severity of the trading restrictions. Such endogenous surplus shares generate multiple, self-fulfilling monetary steady states. When liquidity is interpreted as the number of transactions, the steady state with higher aggregate activities has higher liquidity. In both steady states, an increase in the money growth rate increases aggregate output and consumption by increasing the number of matches.

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File Function: Last version, 2001
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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 63.

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Length: 27 pages
Date of creation: Nov 2000
Date of revision: Oct 2001
Publication status: Published in Annals of Economics and Finance, Nov 2001, pages 325-351
Handle: RePEc:cuf:wpaper:63
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