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Divisible Money in an Economy with Villages

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  • Miquel Faig

Abstract

This paper provides a tractable search model with divisible money that encompasses the two frameworks currently used in the literature. In the model, individuals belong to many villages. Inside a village, individuals are not altruistic as in a representative household, but they share information so financial contracts are feasible. Money is essential in the model to facilitate trade with individuals outside the village. The framework proposed by Lagos and Wright (2002) arises as a special case if some goods trade in competitive markets while others trade in search markets, and preferences are quasi-linear. The framework proposed by Shi (1997) arises as a special case if individuals can insure trading risks inside the village. In general, if preferences are not quasi-linear and trading risks cannot be insured, the distribution of money holdings is non-degenerate and monetary transfers have distributional effects. However, neither quasi-linear preferences nor insurance of trading risks are necessary for tractability. Indeed, this paper advances a tractable benchmark with an endogenous frequency of shopping in which all buyers choose to carry the same amount of money even if preferences are not quasi-linear and trading risks cannot be insured

Suggested Citation

  • Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Econometric Society 2004 North American Summer Meetings 248, Econometric Society.
    • Handle: RePEc:ecm:nasm04:248
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    References listed on IDEAS

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    1. Yi Jin & Ted Temzelides, 2004. "On the Local Interaction of Money and Credit," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 143-156, January.
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    4. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
    5. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
    6. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
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    8. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    9. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    10. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
    11. Guillaume Rocheteau & Randall Wright, 2003. "Inflation and Welfare in Models with Trading Frictions," PIER Working Paper Archive 03-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    12. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    13. Bernhard Rauch, 2000. "A Divisible Search Model of Fiat Money: A Comment," Econometrica, Econometric Society, vol. 68(1), pages 149-156, January.
    14. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, May.
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    Citations

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    Cited by:

    1. Guillaume Rocheteau & Peter Rupert & Karl Shell & Randall Wright, 2005. "General equilibrium with nonconvexities, sunspots, and money," Working Paper 0513, Federal Reserve Bank of Cleveland.
    2. Faig Miquel & Jerez Belén, 2006. "Inflation, Prices, and Information in Competitive Search," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, September.
    3. Ben Craig & Guillaume Rocheteau, 2008. "Inflation and Welfare: A Search Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 89-119, February.
    4. Miquel Faig & Belén Jerez, 2007. "Precautionary Balances and the Velocity of Circulation of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 843-873, June.
    5. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96 Elsevier.
    6. Menner Martin, 2006. "A Search-Theoretic Monetary Business Cycle Model with Capital Formation," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-36, November.
    7. Martin Menner, 2011. ""Gesell Tax" and Efficiency of Monetary Exchange," Working Papers. Serie AD 2011-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    8. Sun, Hongfei, 2007. "Banking, Inside Money and Outside Money," MPRA Paper 4504, University Library of Munich, Germany.
    9. Shoujian Zhang, 2014. "Search Frictions, Job Flows and Optimal Monetary Policy," CDMA Working Paper Series 201402, Centre for Dynamic Macroeconomic Analysis.
    10. Menner, Martin, 2006. "Monetary propagation in search-theoretic monetary models," UC3M Working papers. Economics we066426, Universidad Carlos III de Madrid. Departamento de Economía.
    11. Shouyong Shi, 2006. "Welfare Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-212, University of Toronto, Department of Economics.

    More about this item

    Keywords

    monetary search; divisible money;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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