Money as a mechanism in a Bewley economy
We study what features an economic environment might possess, such that it would be Pareto efficient for the exchange of goods in that environment to be conducted on spot markets where those goods trade for money. We prove a conjecture that is essentially due to Bewley [1980,1983]. Monetary spot trading is nearly efficient when there is only a single perishable good (or a composite commodity) at each date and state of the world; random shocks are idiosyncratic, privately observed, and temporary; markets are competitive; and the agents are very patient. This result is a fairly close analogue, for trade using outside, fiat money, of a recent characterization by Levine and Zame  of environments in which spot trade using inside money, in the form of one-period debt payable in a commodity, is nearly Pareto efficient. We also study a example where expansionary monetary mechanism Pareto dominates laissez-faire or contractionary monetary mechanism in an environment with impatient agents.
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- Levine, David K., 1991.
"Asset trading mechanisms and expansionary policy,"
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- Timothy J. Kehoe & David K. Levine & Michael Woodford, 1990. "The optimum quantity of money revisited," Working Papers 404, Federal Reserve Bank of Minneapolis.
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- Chris Edmond, 2002. "Self-Insurance, Social Insurance, and the Optimum Quantity of Money," American Economic Review, American Economic Association, vol. 92(2), pages 141-147, May.
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