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A Model of Money with Multilateral Matching, Second Version

Author

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  • Manolis Galenianos

    () (Department of Economics, Penn State University)

  • Philipp Kircher

    () (Department of Economics)

Abstract

We develop a model of monetary exchange that avoids several common criticisms of the recent microfoundations literature. First, rather than random matching, we assume that buyers know the location of all sellers, and hence the process of finding a partner is deterministic, although trade is still stochastic since the number of buyers visiting a given seller is random. Second, given multilateral matching, rather than bargaining, we assume that goods are allocated according to second-price auctions. Third, given this mechanism, we do not have to assume agents can observe each other’s money holdings or preferences, as is necessary for tractability with bargaining. A novel result is that homogeneous buyers hold different amounts of money, leading to equilibrium price dispersion. We find the closed-form solution for the distribution of money holdings. We characterize equilibrium and efficient monetary policy.

Suggested Citation

  • Manolis Galenianos & Philipp Kircher, 2005. "A Model of Money with Multilateral Matching, Second Version," PIER Working Paper Archive 07-004, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Nov 2006.
  • Handle: RePEc:pen:papers:07-004
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    References listed on IDEAS

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    Cited by:

    1. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Galenianos, Manolis & Kircher, Philipp, 2008. "A model of money with multilateral matching," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1054-1066, September.

    More about this item

    Keywords

    Search Theory of Money; Budget Constrained Auctions; Friedman Rule;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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