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Search-Based Models of Money and Finance: An Integrated Approach

  • Wright, Randall

    (Federal Reserve Bank of Minneapolis)

  • Trejos, Alberto

    (University of Michigan)

Registered author(s):

    Many applications of search theory in monetary economics use the Shi-Trejos-Wright model, hereafter STW, while applications in finance use Duffie-Gârleanu-Pederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between the literatures, and generates new insights and applications. Even in the special cases of the baseline STW and DGP models, we provide propositions generalizing and strengthening what is currently known, and rederiving some existing results using more tractable arguments.

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    Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 709.

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    Length: 47 pages
    Date of creation: 19 Mar 2014
    Date of revision:
    Handle: RePEc:fip:fedmwp:709
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    1. Green, Edward J. & Zhou, Ruilin, 1998. "A Rudimentary Random-Matching Model with Divisible Money and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 252-271, August.
    2. Ricardo Lagos & Gara Afonso, 2010. "Trade Dynamics in the Market for Federal Funds," 2010 Meeting Papers 424, Society for Economic Dynamics.
    3. 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.
    4. 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.
    5. Berentsen, Aleksander, 2002. "On the Distribution of Money Holdings in a Random-Matching Model," MPRA Paper 37319, University Library of Munich, Germany.
    6. Curtis, Elisabeth & Wright, Randall, 2004. "Price setting, price dispersion, and the value of money: or, the law of two prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1599-1621, November.
    7. Alberto Trejos & Randall Wright, 1993. "Search, bargaining, money and prices: recent results and policy implications," Proceedings, Federal Reserve Bank of Cleveland, pages 558-584.
    8. Francois R. Velde & Warren E. Weber & Randall Wright, . "A Model of Commodity Money, With Application to Gresham's Law and the Debasement Puzzle," CARESS Working Papres 97-7, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    9. Bengt Holmström & Jean Tirole, 2011. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262015781, June.
    10. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May.
    11. Ben R. Craig & Guillaume Rocheteau, 2005. "State-dependent pricing, inflation, and welfare in search economies," Working Paper 0504, Federal Reserve Bank of Cleveland.
    12. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    13. Coles, Melvyn G, 1999. "Turnover Externalities with Marketplace Trading," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 851-68, November.
    14. Aleksander Berentsen & Guido Menzio & Randall Wright, 2009. "Inflation and Unemployment in the Long Run," Kiel Working Papers 1501, Kiel Institute for the World Economy.
    15. Ana Babus & Péter Kondor, 2012. "Trading and Information Diffusion in Over-the-Counter Markets," CEU Working Papers 2012_19, Department of Economics, Central European University, revised 09 Dec 2012.
    16. Ennis, Huberto M., 2001. "On Random Matching, Monetary Equilibria, And Sunspots," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 132-142, February.
    17. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    18. Pierre-Olivier Weill, 2004. "Leaning against the wind," 2004 Meeting Papers 382, Society for Economic Dynamics.
    19. Nicolas Petrosky-Nadeau & Guillaume Rocheteau, . "Unemployment, Financial Frictions, and the Housing Market," GSIA Working Papers 2013-E4, Carnegie Mellon University, Tepper School of Business.
    20. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
    21. Li, Yiting, 1999. "Money and Middlemen in an Economy with Private Information," Economic Inquiry, Western Economic Association International, vol. 37(1), pages 1-12, January.
    22. 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, 05.
    23. Thorsten Koeppl & Jonathan Chiu, 2013. "Trading Dynamics With Adverse Selection and Search," 2013 Meeting Papers 201, Society for Economic Dynamics.
    24. Nosal, Ed & Rocheteau, Guillaume, 2011. "Money, Payments, and Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262016281, June.
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