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Does Money Impede Convergence?

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  • John D Hey
  • Daniela Di Cagno

Abstract

Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemploment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of non-monetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money intrading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.

Suggested Citation

  • John D Hey & Daniela Di Cagno, 2015. "Does Money Impede Convergence?," Discussion Papers 15/02, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:15/02
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    References listed on IDEAS

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    1. John Hey & Daniela Cagno, 1998. "Sequential Markets: An Experimental Investigation of Clower's Dual-Decision Hypothesis," Experimental Economics, Springer;Economic Science Association, vol. 1(1), pages 63-85, June.
    2. Steven Gjerstad, 2013. "Price dynamics in an exchange economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 461-500, March.
    3. Sean Crockett & Ryan Oprea & Charles Plott, 2011. "Extreme Walrasian Dynamics: The Gale Example in the Lab," American Economic Review, American Economic Association, vol. 101(7), pages 3196-3220, December.
    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 927-954, August.
    5. Jean-Pascal Benassy, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 503-523.
    6. Jacob K. Goeree & Luke Lindsay, 2012. "Stabilizing the economy: Market design and general equilibrium," ECON - Working Papers 092, Department of Economics - University of Zurich.
    7. Friedman, Daniel, 1993. "How Trading Institutions Affect Financial Market Performance: Some Laboratory Evidence," Economic Inquiry, Western Economic Association International, vol. 31(3), pages 410-435, July.
    8. Jacob K. Goeree & Luke Lindsay, 2012. "Designing package markets to eliminate exposure risk," ECON - Working Papers 071, Department of Economics - University of Zurich.
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    More about this item

    Keywords

    clearing house mechanism; double auction mechanism; experimental markets; money; monetised trading; non-monetised trading.;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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