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A Model of Money with Multilateral Matching, Second Version

  • Manolis Galenianos

    ()

    (Department of Economics, Penn State University)

  • Philipp Kircher

    ()

    (Department of Economics)

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.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/07-004.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 07-004.

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Length: 30 pages
Date of creation: 01 Dec 2005
Date of revision: 01 Nov 2006
Handle: RePEc:pen:papers:07-004
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  1. Edward J. Green & Ruilin Zhou, 2002. "Dynamic Monetary Equilibrium in a Random Matching Economy," Econometrica, Econometric Society, vol. 70(3), pages 929-969, May.
  2. 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, 01.
  3. Edward J. Green & Ruilin Zhou, 1996. "A Rudimentary Random-Matching Model with Divisible Money and Prices," GE, Growth, Math methods 9606001, EconWPA, revised 25 Jul 1996.
  4. Miguel Molico, 2006. "The Distribution Of Money And Prices In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(3), pages 701-722, 08.
  5. Goldberg, Dror, 2007. "Money with partially directed search," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 979-993, May.
  6. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  7. Gabriele Camera & Cemil Selcuk, 2009. "Price Dispersion with Directed Search," Journal of the European Economic Association, MIT Press, vol. 7(6), pages 1193-1224, December.
  8. 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.
  9. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
  10. Camera, G. & Corbae, D., 1998. "Money and Price Dispersion," Working Papers 98-03, University of Iowa, Department of Economics.
  11. Peter Howitt, 2005. "Beyond Search: Fiat Money In Organized Exchange," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 405-429, 05.
  12. Shouyong Shi, 1995. "Money and Prices: A Model of Search and Bargaining," Working Papers 916, Queen's University, Department of Economics.
  13. 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.
  14. Che, Yeon-Koo & Gale, Ian, 1998. "Standard Auctions with Financially Constrained Bidders," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 1-21, January.
  15. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
  16. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
  17. Dean Corbae & Ted Temzelides & Randall Wright, 2003. "Directed Matching and Monetary Exchange," Econometrica, Econometric Society, vol. 71(3), pages 731-756, 05.
  18. Julien, BenoI^t & Kennes, John & King, Ian, 2008. "Bidding for money," Journal of Economic Theory, Elsevier, vol. 142(1), pages 196-217, September.
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