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Money and the Gains from Trade

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  • Aleksander Berentsen
  • Guillaume Rocheteau

Abstract

This paper studies the role of money in environments where in each meeting there is a double coincidence of real wants. Traders who meet at random finance their purchases through current production, the sale of divisible money or both. It is shown that in the absence of valued money if traders have asymmetric tastes for each other�s good, they produce and exchange socially ine .cient quantities. With valued money, however, traders exchange efficient quantities if the asymmetry of tastes is not too large. It is shown that the gains from trade in the monetary economy are strictly greater than those in the corresponding barter economy, that the Friedman rule holds, and that the allocation of resources in the monetary economy converges to the allocation in the barter economy as the growth rate of the money supply is increased.

Suggested Citation

  • Aleksander Berentsen & Guillaume Rocheteau, "undated". "Money and the Gains from Trade," IEW - Working Papers 100, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:100
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    Cited by:

    1. Brian Peterson & Shouyong Shi, 2006. "Money, price dispersion and welfare," Studies in Economic Theory, in: Charalambos D. Aliprantis & Nicholas C. Yannelis & Gabriele Camera (ed.), Recent Developments on Money and Finance, pages 197-222, Springer.
    2. Al-Jarhi, Mabid, 2017. "Inefficiencies in Search Models: The Case for Islamic Finance," MPRA Paper 82064, University Library of Munich, Germany, revised 19 Oct 2017.
    3. Nicola Amendola, 2008. "A "Double Coincidence" Search Model of Money," CEIS Research Paper 126, Tor Vergata University, CEIS, revised 18 Jul 2008.
    4. Aleksander Berentsen & Alessandro Marchesiani & Christopher Waller, 2014. "Floor Systems for Implementing Monetary Policy: Some Unpleasant Fiscal Arithmetic," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 523-542, July.
    5. Athanasios Geromichalos & Juan M. Licari & Jose Suarez-Lledo, 2019. "Illiquid Financial Markets and Monetary Policy," Papers 1909.01889, arXiv.org.
    6. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, 2007. "Friedman Meets Hosios: Efficiency in Search Models of Money," Economic Journal, Royal Economic Society, vol. 117(516), pages 174-195, January.
    7. Shouyong Shi, 2006. "Viewpoint: A microfoundation of monetary economics," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 643-688, August.
    8. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    9. Aleksander Berentsen & Guillaume Rocheteau, 2002. "Money in Bilateral Trade," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(IV), pages 489-506, December.
    10. 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.
    11. Aleksander Berentsen & Guillaume Rocheteau, 2004. "Money and Information," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 915-944.
    12. Berentsen, Aleksander & Rocheteau, Guillaume, 2002. "On the efficiency of monetary exchange: how divisibility of money matters," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1621-1649, November.
    13. Zeira, Joseph, 2005. "Money and the Size of Transactions," CEPR Discussion Papers 5010, C.E.P.R. Discussion Papers.
    14. Camera, Gabriele & Reed, Robert R. & Waller, Christopher J., 2003. "Can monetizing trade lower welfare? An example," Economics Letters, Elsevier, vol. 81(2), pages 179-186, November.
    15. Branch, William & McGough, Bruce, 2016. "Heterogeneous beliefs and trading inefficiencies," Journal of Economic Theory, Elsevier, vol. 163(C), pages 786-818.
    16. Guillaume Rocheteau & Peter Rupert & Randall Wright, 2007. "Inflation and Unemployment in General Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(4), pages 837-855, December.
    17. Rocheteau, Guillaume & Rupert, Peter & Wright, Randall, 2007. "Inflation and Unemployment in General Equilibrium," University of California at Santa Barbara, Economics Working Paper Series qt2fq1855f, Department of Economics, UC Santa Barbara.
    18. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.

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    More about this item

    Keywords

    Money; Double Coincidence; Bargaining; Search.;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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