the optimal taxation of fiat money in search equilibrium this paper investigates the link between welfare and the taxation of money in the context of a general equilibrium search model where decentralized trading motivates the use of fiat money since buyers with money must invest effort or search intensity to contact sellers with goods a natural trading externality arises given a sufficiently productive economy search efforts will be too low relative to social efficiency this provides a welfare improving role for policies which tax money balances the nature of this role is explored and its implications for optimal monetary policy discussed copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

the distribution of money and prices in search equilibrium this article considers a search theoretic model of monetary exchange agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings determining endogenously the distributions of money and of prices i show that money is neutral if changes in the money supply are accomplished via proportional transfers however within the class of lump sum transfers an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low but when inflation is high enough the opposite effects occur

output prices and the velocity of money in search equilibrium a monetary search model with match specific preferences and traded quantities is analyzed to assess how aggregate output the price level and the velocity of money are affected by various forms of technological change changes in the productive technology lead to output and prices moving in opposite directions but provide no prediction for monetary velocity the matching technology directly affects monetary velocity and output but has little impact on prices transactions technologies which affect the fixed cost of trading are ambiguous with respect to comovements of output and prices but systematically impact velocity

a model of debit card as a means of payment abstract this paper provides an explanation for both the rapid growth in the use of a debit card over time and the cross sectional difference in the use of a debit card using a search theoretic model the trade off between cash and a debit card as means of payment is incorporated such that a buyer incurs disutility cost proportional to the amount of cash holdings while a seller accepting a debit card bears a fixed record keeping cost regardless of transaction amount as record keeping cost decreases with the development of information technology over time disutility cost of cash holdings required for pairwise trade eventually exceeds record keeping cost so that all the agents with different wealth levels choose to use a debit card as a means of payment also disutility cost of cash holdings required for pairwise trade would be higher for the rich than for the poor implying the cross sectional feature of payment pattern that the rich use a debit card more frequently than the poor there are two distinct mechanisms that improve welfare as record keeping cost decreases one is to reduce deadweight loss from holding cash and the other is to reduce its distortionary effect on output produced in pairwise trade

general equilibrium with nonconvexities and money in a general equilibrium economy with nonconvexities there are sunspot equilibria with good welfare properties sunspots can ameliorate the effects of the nonconvexities for these economies we show that agents act as if they have quasi linear utility functions we use this result to construct a new model of monetary exchange along the lines of lagos and wright where trade occurs in both centralized and decentralized markets but instead of quasi linear preferences we assume general preferences but with indivisible labor this suggests that modern monetary theory is more robust than one might have thought it also constitutes progress on the classic problem of integrating monetary economics and general equilibrium theory

a rudimentary random matching model with divisible money and prices abstract we consider a version of kiyotaki and wright s monetary search model in which agents can hold arbitrary amounts of divisible money a continuum of stationary equilibria indexed by the aggregate real money stock exists with all trading occurring at a single price there is always a maximum level of the real money stock consistent with existence of such an equilibrium in the limit as trading becomes faster relative to discounting any real money stock becomes feasible in such an equilibrium in contrast to the original kiyotaki wright model higher equilibrium real money stocks unambiguously correspond to higher welfare in this costless production environment journal of economic literature classification numbers d51 e40

the long run relationship between inflation and output in postwar economies abstract we investigate the relationship between inflation and real output in a large sample of postwar economies our methodology is to use a structural vector autoregression to estimate the response of the level of real output to permanent inflation shocks separately for each country we find that a permanent shock to inflation is not associated with a permanent movement in the level of real output for most countries in our sample the main exceptions are certain low inflation countries in which permanent inflation shocks permanently increase the level of output we also find that permanent inflation shocks do not permanently influence real output growth rates in our sample

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

search sticky prices and inflation this paper examines equilibrium in a deflationary environment in a market with free entry where consumers search and firms set prices on individual units of the commodity prices attached to newly produced goods are continuously adjusted prices attached to previously produced goods can only be changed at a cost deflation cuts into the market power created by the need to search for the good thus consumers welfare is inverse u shaped in deflation

the distribution of money balances and the nonneutrality of money recent monetary models with explicit microfoundations are made tractable by assuming that agents have access to centralized markets after one round of decentralized trade given quasi linear preferences this makes the distribution of money degenerate which keeps the models simple but precludes the discussion of distributional effects of monetary policy we generalize these models by assuming two rounds of trade before agents can readjust their money holdings to study a range of new distributional effects analytically we show that unexpected symmetric lump sum money injections may increase short run output and welfare whereas asymmetric injections may increase long run output and welfare

a divisible search model of fiat money this paper extends the kiyotaki wright search model of fiat money to allow for divisible money and goods the extension allows me to examine the standard issues in monetary economics such as the neutrality and superneutrality of money by severing the artificial link in the kiyotaki wright model between the money supply and the number of money holders it is shown that money is neutral but not superneutral money growth generates a trading opportunity effect it changes the fraction of different agents in the economy and hence changes the probability with which agents have a successful match in addition money growth has a negative effect on the real money balance that is familiar in walrasian monetary models the balance of the two effects can imply a positive optimal money growth rate

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

asset trading mechanisms and expansionary policy abstract previous authors have argued that the otimal monetary policy is contractionary if buyers value consumption substantially more than sellers there is some randomness and informational constraints make asset trading useful we show that there is an incentive compatible expansionary policy that dominates all incentive compatible contractionary policies

money and credit redux do we need both money and credit in models with explicit roles for payment instruments we show the answer is no if credit is easy money is useless if credit is tight money can be essential but then credit is irrelevant and changes in debt limits are neutral real balances respond endogenously to leave total liquidity constant this is true for exogenous or endogenous policy and debt limits secured or unsecured credit and fairly general preferences and pricing mechanisms while we also show how to overturn some results the benchmark model suggests credit conditions matter less than some people think

generalized search theoretic models of monetary exchange abstract virtually all simple search models of money assume agents with money cannot produce and so everyone has either 0 or 1 units of money in steady state we alternatively assume agents can always produce and simply restrict money inventories to 0 or 1 this seems better for many issues for example in the standard model it is difficult to interpret increases in the money supply because increasing the fraction of agents holding money decreases the economy s productive capacity our model avoids these problems and thus delivers more natural and simpler implications in many contexts we compare results on existence multiplicity and welfare across models

introduction to the symposium issue on money and liquidity abstract this symposium on money and liquidity follows a conference held in santa barbara in august 2014 under the sponsorship of the laboratory for aggregate economics and finance at ucsb the conference was a celebration of the twenty fifth anniversary of the publication of kiyotaki and wright s on money as a medium of exchange this symposium contains a selection of the papers presented at the conference and a selection of regular submissions that fit the theme all papers were peer reviewed according to the usual jet procedures

whither monetary economics i argue that monetary economics should be pursued by applying implementation theory to models which contain explicit frictions that make money essential the argument has two parts first i argue that models in which real balances are assumed to be productive models with money in utility or production functions or with cash in advance constraints contain hidden inconsistencies second i argue that the approach advocated is capable of providing new insights about some of the main issues in monetary economics the effects of monetary shocks the welfare cost of inflation and the roles of inside and outside money

money and price dispersion we relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion in this case buyers and sellers enter matches with potentially different willingness to trade across the distribution of possible bilateral matches prices generally will differ even though agents have identical preferences and technologies we provide existence conditions for a particularly simple equilibrium pattern of exchange we prove that in the limiting case where search frictions are eliminated equilibrium prices are uniform we also show that a higher initial money stock can raise the average price level and increase price dispersion

nonneutrality of money in dispersion hume revisited for a class of standard and widely used preferences a one shot money injection in a standard matching model can induce a significant and persistent output response by dispersing the distribution of wealth decentralized trade matters for both persistence and significance in the presence of government bonds the injection has a liquidity effect and the inflation rate right following the injection may be below the steady state rate level

testing for subadditivity of vertically integrated electric utilities the public policy debate over electric utility deregulation has a long history and generated a considerable amount of research much of this research focused on estimating the degree of scale economies in generation with little attention given to the effect vertical integration may have on cost structure the vertical integration issue is important because most observers consider the transmission and distribution stages to be natural monopolies according to joskow and schmalensee economics of integration if any would link the production stages together possibly extending natural monopoly conditions from transmission distribution to generation even if the latter exhibited no economies of scale 27 refs 5 tabs

the redistributive effects of inflation and the shape of money demand abstract i quantify the distributional effects of expected inflation in a sample of oecd countries using a microfounded model of money where agents differ in their consumption risk against which they can insure using money and government bonds the model is calibrated using harmonized wealth microdata from the luxembourg wealth study i find that the inflation tax is progressive for low inflation levels but it becomes regressive as inflation increases cut off points vary across countries and depend on discount factors and heterogeneity in consumption risk across agents moreover i find that the magnitude of inflation s distributional impact depends not only on wealth distribution but also and importantly on the curvature and height of the money demand curve indeed a higher and less elastic money demand leads to more regressive effects of inflation thus implying such effects are not necessarily stronger in a country with a more unequal wealth distribution

viewpoint a microfoundation of monetary economics in this lecture i explain what the microfoundations of money are about and why they are necessary for monetary economics then i review recent developments of a particular microfoundation of money commonly known as the search theory of money finally i outline some unresolved issues dans cette presentation l auteur explique ce que sont les microfondations de la monnaie et pourquoi elles sont necessaires a l economie monetaire ensuite il passe en revue certains developpements recents d une microfondation particuliere de la monnaie connue sous le nom de theorie de la recherche de la monnaie enfin l auteur fait le tour d un ensemble de problemes qui restent sans solution pour le moment

inflation price dispersion and market integration through the lens of a monetary search model monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and thus on the level of market integration for less integrated markets the inflation price dispersion nexus is predicted to be asymmetrically v shaped which results in an optimal inflation rate above zero for highly integrated markets with low search costs however the impact of inflation on price dispersion should only be small using price data of the european union member states this paper is the first that tests and confirms these predictions of monetary search theory

liquidity quality production cost and welfare in a search model of money this paper examines a search model of money with divisible commodities of high and low quality while keeping the assumptions of indivisible money and unit inventory constraint with no direct barter and a higher fixed cost of producing high relative to low quality an increase in the money stock encourages the production of high quality output by trading off the larger trading opportunities against the significance of higher fixed cost as long as the fixed cost differential between high and low quality is sufficiently small relative to the utility gain from high quality consumption the quality improvement outweighs the negative effect of higher money stocks on aggregate production and hence implies higher welfare the most important function of money is its role as a medium of exchange wicksell 1906 1967 p 17 defined a general medium of exchange to be an object which is habitually and without hesitation taken by anybody in exchange for any commodity the main challenge facing monetary theory is to construct a model which permits the object s role in exchange to be endogenous 1 kiyotaki and wright 1991 1993 seems to be the first fully coherent model which specifies the environment and equilibrium concept in a way that does not force at the outset the assumption on which objects will play a special role in trade the kiyotaki wright model departs from the physical environment of the standard general equilibrium model through the assumption that trading histories are private information the medium of exchange role of money is obtained as an outcome of nash equilibrium together with some bargaining rule in pairwise random meetings however the standard kiyotaki wright model yields an undesirable welfare implication that an increase in the money stock eventually leads to a decrease in welfare because of a decrease in the number of agents who get to consume in a given period the same welfare property is obtained in the models with divisible commodities such as trejos and wright 1995 and shi 1995 2 this property has been regarded as the outcome of the original kiyotaki wright assumptions of indivisible money and the inventory constraint agents can only carry one object either commodity or money at a time despite simplifying the distribution of money holdings these assumptions impose the restriction that agents are not allowed to produce while they hold money

monetary policy and endowment risk in a limited participation model i introduction an asset market segmentation model is constructed in this paper to study the risk sharing role of monetary policy economic agents face uninsurable endowment risk when there is limited asset market participation because an initial money injection goes first to those who can access the asset market money is nonneutral and monetary policy redistributes consumption across agents thus monetary policy plays a risk sharing role that provides crude insurance limited participation models that capture nonneutralities of money were initially developed by grossman and weiss 1983 and rotemberg 1984 and followed by lucas 1990 fuerst 1992 and chatterjee and corbae 1992 recently alvarez and atkeson 1997 alvarez lucas and weber 2001 and alvarez atkeson and kehoe 2002 have made important contributions but they focus on the implications of liquidity effects asset prices and the exchange rate instead of the risk sharing implications of monetary policy my model is built on alvarez lucas and weber 2001 there are two types of households traders who participate in the asset market and nontraders who do not these types are determined exogenously in each period traders receive constant endowments whereas nontraders face uninsurable endowment shocks in the asset market the government injects money through open market operations and traders initially receive the money injection in equilibrium money is nonneutral and monetary policy redistributes consumption between traders and nontraders the government money injection increases traders consumption and decreases nontraders consumption because traders get the money injection through the asset market whereas nontraders suffer from inflation if nontraders all receive the same endowment shock then monetary policy is a perfect risk sharing tool that can smooth out consumption across traders and nontraders however if nontraders receive idiosyncratic endowment shocks then monetary policy is not enough to perfectly insure nontraders although monetary policy does not achieve a pareto optimal allocation it can mitigate the dispersion of consumption across nontraders the optimal money growth rate can be positive or negative depending on the endowment distribution the friedman rule is not optimal in general there is a set of limited participation literature where the asset market is endogenously segmented chatterjee and corbae 1992 alavarez atkeson and kehoe 2002 chiu 2004 and chiu and molico 2007 although endogenous asset market segmentation is useful in some contexts for this paper nothing is lost by assuming exogenous segmentation and much is gained in simplicity models of the redistributional effects of monetary policy include levine 1991 shi 1999 berentsen camera and waller 2005 and molico 2006 the models studied by levine 1991 and mollico 2006 are particularly relevant levine 1991 studies an incomplete markets environment where positive money growth implemented through lump sum transfers can be optimal molico 2006 studies a search environment and shows similarly that positive inflation with lump sum transfers can be welfare enhancing but not at high rates of inflation in both the levine 1991 and molico 2006 environments there is an insurance role for monetary policy much as in the environment studied in this paper the model here has the virtue of being much more tractable than either the levine 1991 or molico 2006 models furthermore a novelty here is to study an insurance role for monetary policy in the context of market segmentation where the agents who received the first round effects of monetary policy do not wish to share risk among themselves the key risk sharing problem has to do with risk sharing between asset market participants and nonparticipants the remainder of the paper is organized as follows

financial sophistication and the distribution of the welfare cost of inflation abstract the welfare cost of anticipated inflation is quantified in a calibrated model of the u s economy that exhibits tractable equilibrium dispersion in wealth and earnings inflation does not generate large losses in societal welfare yet its impact varies noticeably across segments of society depending also on the financial sophistication of the economy if money is the only asset then inflation mostly hurts the wealthier and more productive agents while those poorer and less productive may even benefit from inflation the converse holds in a more sophisticated financial environment where agents can insure against consumption risk with assets other than money

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

the case for a financial approach to money demand the distribution of money across households is much more similar to the distribution of financial assets than to that of consumption levels even controlling for life cycle effects this is a puzzle for theories which directly link money demand to consumption such as cash in advance cia money in the utility function miuf or shopping time models this paper shows that the joint distribution of money and nancial assets can be explained by an incomplete market model when frictions are introduced into financial markets money demand is modeled as a portfolio choice with a fixed transaction cost in financial markets

existence of steady states with positive consumption in the kiyotaki wright model we prove the general existence of steady states with positive consumption in an n goods and fiat money version of the kiyotaki wright model by admitting mixed strategies we also show that there always exists a steady state in which everyone accepts a least costly to store object in particular if fiat money is one such object then there always exists a monetary steady state we also establish some other properties of steady states and comment on the relationship between steady states and incentive feasible allocations

uncertainty inflation and welfare this paper studies the welfare costs and the redistributive effects of inflation in the presence of idiosyncratic liquidity risk in a microfounded search theoretical monetary model we calibrate the model to match the empirical aggregate money demand and the distribution of money holdings across households and study the effects of inflation under the implied degree of market incompleteness we show that in the presence of imperfect insurance the estimated long run welfare costs of inflation are on average 40 to 55 smaller compared to a complete markets representative agent economy and that inflation induces important redistributive effects across households

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

search price setting and inflation a model of monopolistic competition in an inflationary environment is developed which embodies optimal sequential search price dynamics and entry on the part of consumers and firms respectively equilibrium price strategies are s s these bounds increase continuously with consumer search costs and so does price dispersion indeed the whole equilibrium varies smoothly from the competitive bertrand to the monopolistic diamond 1971 end of the spectrum the latter s paradoxical result is explained as a limiting case where frictions on firms side of the market price adjustment costs but not on buyers search costs tend to zero a positive relationship between smooth and perfectly anticipated inflation and price dispersion or uncertainty is established

a contribution to the pure theory of money abstract this article analyzes a general equilibrium model with search frictions and differentiated commodities because of the many differentiated commodities barter is difficult in that it requires a double coincidence of wants and this provides a medium of exchange role for fiat currency we prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment rate of return dominance liquidity and the welfare implications of fiat money are discussed

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

preferences inflation and welfare abstract this paper systematically examines how degrees of household risk aversion ra and elasticity of intertemporal substitution eis impact the welfare costs of inflation in a heterogeneous agent environment featuring capital and essential money empirical evidence suggests that households have degrees of ra and eis that differ on average from traditional values and display large amounts of dispersion capturing these empirical features of preference values in an otherwise standard model leads to welfare enhancements of inflation due to household substitution of money for capital the analysis also compares the welfare implications for alternative ways to implement monetary policy

inflation and efficiency in search markets this paper examines how inflation affects efficiency and output in monopolistically competitive search markets it formalizes the conventional wisdom linking higher inflation price dispersion and increased resources devoted to search it also brings to light the induced exit of arms which reduces rent dissipation but the most important effect of inflation is how it alters the distribution of real transactions prices whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure and especially on whether search costs are large or small relative to consumer surplus

a new suggestion for simplifying the theory of money we propose a new search theoretic model of monetary exchange with indivisible assets based on price posting instead of bargaining and incorporating noisy search this yields some familiar results plus a lot more the model admits multiple steady states due to the self referential nature of liquidity it admits cyclic chaotic and stochastic equilibria and compared to bargaining versions the dynamics are more general and have better microfoundations it generates price dispersion with interesting efficiency implications plus sticky prices and rational inattention parametric examples yield closed form solutions based on these results we suggest this should become a benchmark model in monetary economics

search based models of money and finance an integrated approach many applications in monetary economics of search and bargaining theory use shi trejos wright hereafter stw many applications in finance use duffie g rleanu pedersen hereafter dgp these models share several features and both concern liquidity yet they also differ in stw agents use assets as payment instruments when trading goods in dgp they pay with goods or transferable utility when trading assets we integrate the two this clarifies connections between the literatures and generates novel insights several new results are provided for the baseline stw and dgp models while the integrated structure generates even more interesting outcomes including endogenous transactions patterns and belief based dynamics

individual transferable quotes in a multiproduct common property industry this paper extends the method of virtual prices for quantity constraints to provide inverse derived demand functions for quotas and quota market equilibrium and pricing the approach is applied to evaluate the anticipated effects of a potential program of individual transferable quotas addressing the ill structured property rights and market failure of a multiproduct common property fishery the results indicate that individual transferable quotas on multiple products may not generate the desired rents or achieve biological objectives owing to limitations when joint products are regulated however an individual transferable quota on a single joint product may induce industry disinvestment and reduce overcapitalization

optimal monetary policy distribution efficiency versus production efficiency this paper investigates the trade off between distribution effect and production effect of monetary policy when there exist unobservable idiosyncratic liquidity shocks in the absence of risk sharing arrangements such as a credit market monetary policy serves to provide ex post insurance to smooth consumption specifically issuing interest bearing bonds restores credit transactions on money through bond money exchanges such a policy has a positive distribution effect but the resulting inflation hampers production efficiency it is demonstrated that the trade off between distribution efficiency gain and production efficiency loss would result in net welfare enhancement if consumers are relative risk averse enough politique monetaire optimale efficacite dans la distribution versus efficacite dans la production ce memoire examine la relation d equivalence entre l effet sur la distribution et l effet sur la production de la politique monetaire quand existent des chocs de liquidite idiosyncratiques non observables en l absence d arrangement pour le partage des risques tel qu un marche du credit la politique monetaire sert d assurance ex post pour lisser les variations dans les niveaux de consommation specifiquement emettre des obligations qui paient des interets restore les transactions monetaires de credit via les echanges obligations monnaie une telle politique a un effet positif sur la distribution mais l inflation qui en resulte nuit a l efficacite de la production on montre que la relation d equivalence entre les gains d efficacite dans la distribution et la perte d efficacite dans la production resultent en une amelioration du niveau net de bien etre si les consommateurs ont une aversion suffisamment grande au risque relatif

monetary policy and efficiency in over the counter financial trade we develop a monetary model that incorporates over the counter otc asset trade after agents have made their money holding decisions they receive an idiosyncratic shock that affects their valuation for consumption and hence for the unique liquid asset namely money subsequently agents can choose whether they want to enter the otc market in order to sell assets and thus boost their liquidity or to buy assets and thus provide liquidity to other agents a unique feature of our model is that inflation affects welfare not only through the traditional channel i e through determining equilibrium real balances but also through influencing agents entry decisions in the financial market we use our framework to study the effect of inflation on welfare asset prices and otc trade volume in contrast to most monetary models which predict a negative relationship between inflation and welfare we find that inflation can be welfare improving within a certain range because it mitigates a search externality that agents impose on one another when they make their otc market entry decision

money search and business cycles monetary models that specify explicit frictions to generate money demand have been developed over the last 20 years and have been used to address many questions in this article i investigate the short run properties of a particular model considering a number of versions based on some modeling choices all versions feature flexible prices i find that in many aspects both real and nominal the model resembles other more reduced form models some variations of the model come closer to matching some key nominal facts than a reduced form model the model also generates counter cyclical markups in line with the data

a dynamic equilibrium model of search bargaining and money abstract this paper considers dynamic equilibria in a model with random matching strategic bargaining and money equilibrium in the bargaining game is characterized in terms of a simple differential equation when we embed this characterization into the monetary economy the model can generate outcomes such as limit cycles that never arise if one imposes a myopic nash bargaining solution as has been done in the past journal of economic literature classification numbers c78 d83 e31