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Money, Technology Choice and Pattern of Exchange in Search Equilibrium

  • Jun Zhang
  • Haibin Wu

This paper examines the production aspect of money to bridge between the search-theoretic models and the canonical Walrasian growth models. In this paper, we argue that money can generate real effects via technology choice (high vs. low), we model explicitly the pattern of exchanges to explore through which channels money affects technology choice. We inquire (i) whether money encourages adoption of the high technology and (ii) whether the presence of trade frictions grants the high technology advantageous. While high quality goods yield greater consumption value, they incur a production time delay and a greater production cost. We allow buyers to form their best responses to accepting different types of goods. In a complete information world, we characterize the steady-state monetary equilibrium with both instantaneous and non-instantaneous production. We provide conditions under which the high technology equilibria is Pareto dominant or social welfare-enhancing, depending crucially on the quantity of money in the economy if production takes time. We examine how the introduction of money affects the technology choice by mitigating the high technology's disadvantage in production delay. We then identify a social inefficiency caused by producers' under-investment in the advanced technology in decentralized equilibrium

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 212.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:212
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  1. Sik Kim, Young, 1996. "Money, barter, and costly information acquisition," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 119-142, February.
  2. Alberto Trejos, 1997. "Incentives to produce quality and the liquidity of money (*)," Economic Theory, Springer, vol. 9(2), pages 355-365.
  3. Trejos, Alberto, 1999. "Search, Bargaining, Money, and Prices under Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 679-95, August.
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  5. Gabriele Camera & Robert R. Reed & Christopher J. Waller, 2003. "Jack of All Trades or a Master of One? Specialization, Trade, and Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1275-1294, November.
  6. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 927-42, November.
  7. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
  8. Williamson, S. & Wright, R., 1991. "Barter and Monetary Exchange Under Private Information," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9107, University of Western Ontario, The Centre for the Study of International Economic Relations.
  9. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
  10. Kim, Young Sik & Yao, Shuntian, 2001. "Liquidity, Quality, Production Cost, and Welfare in a Search Model of Money," Economic Journal, Royal Economic Society, vol. 111(468), pages 114-27, January.
  11. Diamond, Peter & Yellin, Joel, 1990. "Inventories and Money Holdings in a Search Economy," Econometrica, Econometric Society, vol. 58(4), pages 929-50, July.
  12. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  13. Shouyong Shi, 1997. "Money and specialization," Economic Theory, Springer, vol. 10(1), pages 99-133.
  14. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  15. Derek Laing & Victor E. Li & Ping Wang, 2000. "Inflation, trade frictions, and productive activity in a multiple-matching model of money," Working Paper 2000-28, Federal Reserve Bank of Atlanta.
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