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

a search theoretic model of the retail market for illicit drugs a search theoretic model of the retail market for illegal drugs is developed trade occurs in bilateral potentially long lived matches between sellers and buyers buyers incur search costs when experimenting with a new seller moral hazard is present because buyers learn purity only after a trade is made this model is consistent with some new stylized facts about the drugs market and it is informative for policy design the effectiveness of different enforcement strategies is evaluated including some novel ones that leverage the moral hazard present in the market copyright oxford university press

government spending the balance of trade and the terms of trade in british history abstract this paper investigates the relationship between government spending the balance of trade and the terms of trade using early british data a large open economy intertemporal framework in which ricardian equivalence holds predicts a larger effect of temporary government spending changes on the trade deficit than permanent ones further a pure switch between debt and taxes should have no effect on trade flows the results provide some support for these hypotheses although they are sensitive to sample period and the method of decomposition of government spending a negative relationship between government spending and the terms of trade is also found

decentralized trade mitigates the lemons problem in markets with adverse selection only low quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low we show that under decentralized trade however both high and low quality units trade although with delay moreover when frictions are small the surplus realized is greater than the static competitive surplus thus decentralized trade mitigates the lemons problem remarkably payoffs are competitive as frictions vanish even though both high and low quality units continue to trade and there is trade at several prices markets differ in the degree to which trade is centralized call markets used to set opening prices on the nyse are highly centralized and all trade takes place at a single price the market clearing price in contrast in housing labor or used car markets trade is highly decentralized and prices are determined by bilateral bargaining between buyers and sellers and may differ between trades the competitive model abstracts away from these institutional aspects thus providing a model suitable in principle for the study of both centralized and decentralized markets our results suggest that decentralized markets with adverse selection may perform better than anticipated by the static competitive model and therefore that these institutional features cannot be ignored it is known that in markets for homogenous goods decentralized trade tends to yield competitive outcomes when trading frictions are small because competitive equilibrium is efficient in these markets this implies that decentralized trade generates nearly efficient outcomes in markets with adverse selection however competitive equilibria ce need not be efficient which raises the possibility that alternative market structures perform better in this article we study a version of akerlof s 1970 market for lemons in which trade is decentralized each period an equal measure of buyers and sellers enters the market every seller is endowed with a unit of either high or low quality at each period every agent in the market has a positive probability of meeting an agent of the opposite type once matched a buyer without observing the quality of the seller s unit makes a take it or leave it price offer if the seller accepts then they trade at the offered price and both agents exit the market if the seller rejects the offer then both agents remain in the market at the next period discounting of future gains and the possible delay in matching with a trading partner constitute trading frictions when the average quality of the good held by entering sellers is low the market has a unique competitive equilibrium ce in which the price equals the buyers value of a low quality unit

wealth as a signal in the search model of money this article investigates the possibility that wealth holdings of money serves as a signal of the ability to produce high quality products for agents who cannot directly observe the quality of the products a producer s wealth may advertise past success in selling products to agents who knew the producer s ability and thus signal its ability this analysis shows that such signaling effects may arise in equilibrium and may lead to more unequal distributions of wealth and lower welfare than would otherwise arise

a model of the liquidity structure based on asset indivisibility abstract although the notion of a liquidity structure of asset yields is widely accepted there do not seem to be models of such a structure here the liquidity of an asset is taken to be its transaction velocity the amount traded per unit time divided by the stock assets are assumed to be indivisible and to differ in size trade using such assets is implied by pairwise matching and absence of double coincidence in produced goods it is shown that a sufficiently large asset has a lower velocity and a higher yield than a sufficiently small asset

committed procurement in privately negotiated markets evidence from laboratory markets previous research suggests an increase in committed procurement can result in lower cash market prices for livestock there is a paucity of research that ascertains prices received by market agents trading in a prior bargaining session via alternative marketing arrangements versus those who have not we use laboratory market experiments to analyze the potential impacts of committed procurement on privately negotiated transactions when some traders have two windows of negotiation and others have one results illustrate that those who do not engage in prior trading are at a bargaining disadvantage due to matching and inventory loss risks

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

barter and monetary exchange under private information the authors develop a model of production and exchange with uncertainty concerning the quality of commodities and study the role of fiat money in ameliorating frictions caused by private information the model is specified so that without private information only high quality commodities are produced and there is no welfare gain from using money with private information there can be equilibria and sometimes multiple equilibria where low quality commodities are produced and money can increase welfare money works by promoting useful production and exchange in efficient monetary equilibria agents adopt strategies that increase the probability of acquiring high quality output copyright 1994 by american economic association

money barter and costly information acquisition abstract endogenous information structure is analyzed in a search model of production and exchange under qualitative uncertainty by allowing agents to invest in an inspection technology at a fixed cost where incurring a higher cost permits quality to be recognized with higher probability in any equilibria where agents acquire information some bad commodities are always produced the information acquisition promotes production and exchange of good commodities as the information problem becomes severe money can improve welfare by economizing on information costs in the optimal monetary equilibrium agents adopt trading strategies which contribute to the saving of information costs

money and the gains from trade this article 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 inefficient 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

an information based theory of international currency abstract this paper develops an information based theory of international currency based on search frictions private trading histories and imperfect recognizability of assets using an open economy search model with multiple competing currencies the value of each currency is determined without requiring agents to use a particular currency to purchase a country s goods strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements while some inflation can benefit the country issuing an international currency the threat of losing international status puts an inflation discipline on the issuing country when monetary authorities interact in a simple policy game the temptation to inflate can lead optimal policy to deviate from the friedman rule the calibrated model can produce a welfare cost of losing international status for the issuing country larger than previous findings though estimates depend critically on inflation rates and information costs

matching with interviews abstract this paper explores how interviews affect the matching process when worker productivity is private information wages are determined by a single round of strategic bargaining after the worker is interviewed the implications of this hiring process for the efficiency of matching and the incidence and severity of statistical discrimination are considered the better are firms at identifying productive workers the worse the average quality of the unemployment pool so interviewing tends to slow down matching for every one multiple pareto rankable equilibria are possible such that any social group in a bad equilibrium faces stricter hiring standards longer spells of unemployment and lower welfare

payments and liquidity under adverse selection informational asymmetries regarding the future value of assets affect their role in exchange i construct a random matching economy composed of two assets a risk free bond and a lucas tree whose terminal value is privately known to its holder no restrictions are imposed on payment arrangements the main finding supports a pecking order theory of payments agents use their risk free bonds first in order to finance their spending shocks and they use their information sensitive assets only if their holdings of bonds are depleted the theory has implications for the optimal provision of risk free bonds the structure of asset returns and liquidity

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

the reeded edge and the phillips curve money neutrality common knowledge and subjective beliefs abstract i present a simple two person auction model in which a seller and a buyer make bids in terms of money however the value of a unit of money is uncertain i show 1 a monetary revaluation has purely nominal effects if and only if it is common knowledge 2 if seller and buyer have identical beliefs making the value of money common knowledge maximizes total gains from trade 3 if seller and buyer are equally well informed and have identical beliefs then monetary revaluations have no net effect 4 when the seller knows the value of money but the buyer does not the expected utilities of both seller and buyer are proportional to 1 1 2 where is the standard deviation of the value of money expressed as a fraction of the mean and 5 when beliefs are subjective monetary policy can improve total gains from trade as in friedman s explanation of the phillips curve and an optimal level of inflation can be determined journal of economic literature classification numbers c78 e52

compensation for quality difference in a search model of money we study an economy in which there is always double coincidence of wants agents have perfect information about qualities of goods and there are no transaction costs the hold up problem arises because efforts invested in improving quality prior to search may not be compensated in the market situations in which barter fails to motivate quality improvement are identified with money however the extra effort in quality improvement will be compensated when high quality good producers trade with agents holding both the low quality good and money injection of money can induce almost all agents to produce the high quality good

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

liquidity and asset market dynamics this study analyzes economies with an essential role for liquid assets in the exchange process the model can generate multiple stationary equilibria across which asset prices market participation capitalization output and welfare are positively related it can also generate a variety of nonstationary equilibria even when fundamentals are deterministic and time invariant including periodic chaotic and stochastic sunspot equilibria with recurrent market crashes some equilibria have asset price trajectories that resemble bubbles growing and bursting endogenous private and public liquidity is also introduced sometimes it is efficient to provide enough liquid assets to satiate demand other times it is not

undefeated equilibria of the shi trejos wright model under adverse selection abstract decentralized markets where assets are useful as media of exchange are also usually subject to private information to analyze the liquidity and prices of such assets i adapt the shi 1995 trejos and wright 1995 model with lucas trees under adverse selection while most studies focus on either a pooling or separating equilibrium i apply the undefeated equilibrium refinement by mailath et al 1993 to make the selection based on fundamentals under pooling the high quality asset holder accepts a pooled price and under separating signals quality through asset retention applying the refinement results in a regime switch from no information pooling to information revelation separating following a negative shock to the quality or quantity of lemons this change leads to a discontinuous fall in aggregate welfare

barter in the us economy a macroeconomic analysis in this paper a statistical model is developed to examine the determinants of the growing level of barter transactions in the us although a barter system is believed to be pareto inferior to a money system recent statistics of the estimated level of barter transactions in the us show a rapidly growing interest by large corporations as well as individuals in this type of trade the primary obstacle in empirical research in this area is the difficulty of measuring the size of barter transactions here data from barter exchange organizations are used to test the significance of several variables the ordinary least squares and cointegration and error correction models are employed as two alternative empirical techniques to analyse the data the results support the counter cyclical arguments as well as the inflation factor however the notion of tax evasion as a motive in organized barter receives only a partial support

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

a model of the threat of counterfeiting abstract a simple matching model of money with the potential for counterfeiting is constructed in contrast to the existing literature lotteries are included these provide scope for the operation of the intuitive criterion of cho and kreps the application of that refinement is shown to imply that there is no equilibrium with counterfeiting if the cost of producing counterfeits is low enough then there is no monetary equilibrium otherwise there is a monetary equilibrium without counterfeiting in other words the threat of counterfeiting can eliminate the monetary equilibrium

commodity money under private information abstract private information is introduced into the kiyotaki wright model of commodity money in terms of qualitative uncertainty concerning the good which would be the unique medium of exchange under complete information producers are allowed to produce high or low quality versions of that good and people may not always recognize its quality it is shown that commodities that suffer from qualitative uncertainty may still be used as the medium of exchange when the private information problem is not too severe this is so despite the fact that in some equilibria there is necessarily some low quality commodity money in circulation when the information problem is so severe that the good of uncertain quality cannot be the unique money there can exist an equilibrium with dual commodity monies of which one is the good subject to qualitative uncertainty

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

an overlapping generations model with search abstract search is embedded in an overlapping generations model the young participate in a centralized market and then are matched in pairs in a decentralized market the old only participate in the centralized market if the buyer s bargaining power in pairwise trade is close to unity and if the old are risk averse then the golden rule rate of money transfer is positive such risk aversion the pairwise meetings and dependence of the young s saving on the rate of return are necessary for this result

adverse selection and liquidity distortion this article develops a tractable model with two dimensional asymmetric information in asset markets sellers are privately informed about their asset quality and distress positions illiquidity arises endogenously and manifests itself through two distinct market outcomes the first outcome features limited market participation resulting in a dry up in trading volume the second outcome involves a large volume at a depressed price only in the latter outcome do distressed sellers engage in fire sales quickly unwinding their positions at a steep price discount the article further establishes that this equilibrium can arise only when buyers expect that sellers with a higher need for immediacy will on average have higher quality assets hence both the information structure and the distribution of sellers distress are crucial for the existence of fire sales

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

asymmetry imperfectly transferable utility and the role of fiat money in improving terms of trade abstract we modify the kiyotaki and wright 1991 j economic theory 53 215 235 1993 amer econom rev 83 63 77 framework so that there is a universal double coincidence of wants in all barter matches we also introduce divisible service sidepayments into the model and allow agents to bargain over bundles of goods services and money in bilateral matches in asymmetric matches the agent that values the other s good more dearly will typically have to make a substantial service sidepayment to complete the bargain when sidepayments transfer utility imperfectly the general equilibrium is inefficient agents barter too much when barter is inefficient a robust monetary equilibrium may exist which improves welfare both robust monetary equilibria and welfare improving monetary equilibria require asymmetric matches imperfectly transferable utility and monetary exchange yields better expected terms of trade than barter in contrast to other search models money does not speed up trade