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

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

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

money credit and banking in monetary models where agents are subject to trading shocks there is typically an ex post inefficiency since some agents are holding idle balances while others are cash constrained this problem creates a role for financial intermediaries such as banks who accept nominal deposits and make nominal loans in general financial intermediation improves the allocation the gains in welfare come from the payment of interest on deposits and not from relaxing borrowers liquidity constraints we also demonstrate that when credit rationing occurs increasing the rate of inflation can be welfare improving

a leviathan central bank modeling seigniorage in a money search model this paper studies the nature of optimal monetary policy under a utility maximizing monetary authority in a micro founded model of money based on lagos and wright 2005 such a monetary authority represents a monopoly private money supplier or situations where fiscal policy drives monetary policy and hence the name leviathan under no commitment i characterize an equilibrium with reputation concerns the centralized market interaction is modeled as an infinitely repeated game between the leviathan monetary authority a large player and the economic agents small players where the size of the players refers to the ability to influence aggregate outcomes this large small player dynamics pins down the equilibrium set of payoffs under the assumption that agents do not refuse to use money purely for coordination reasons the one shot game has a unique nash equilibrium with maximum inflation tax the set of equilibria is considerably enlarged in the infinite repetition of the game and equilibria with a lower inflation tax can also be supported by providing appropriate incentives to the money supplier

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

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 money and prices it is well known that models in which money is used as a medium of exchange to lubricate trading frictions display multiplicity of equilibria i show that the amount of activity varies as the value of money differs across these equilibria when production opportunities involve random fixed costs when money has high value trade is more profitable therefore there will be more agents engaged in trade relative to equilibria in which money has lower value the higher activity equilibria display higher production not only because more is produced and exchanged per transaction but also because more transactions occur per period this diamond style result is obtained without increasing returns in the matching technology

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

a search model of unemployment and inflation in this paper i introduce money in the standard labor matching model mortensen and pissarides 1999 pissarides 2000 a double coincidence problemmakes fiat money necessary as a medium of exchange in the long run a rise inthe rate of money growth leads to higher inflation and higher unemployment sothe long run phillips curve is not vertical the optimal monetary growth ratedecreases with the workers bargaining power the level of unemploymentbenefits and the payroll tax rate

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

the rise of the added worker effect we document that the added worker effect awe has increased over the last three decades we develop a search model with two earner households and we illustrate that the increase in the awe from the 1980s to the 2000s can be explained through i the narrowing of the gender pay gap ii changes in the frictions in the labor market and iii changes in the labor force participation costs of married women

efficiency improvement from restricting the liquidity of nominal bonds abstract in a monetary search model with nominal bonds agents face matching taste shocks but they cannot insure borrow or trade against such shocks a government imposes a legal restriction that prohibits bonds from being used to buy a subset of goods i show that this legal restriction can increase the society s welfare in contrast to the literature this efficiency role persists in the steady state and even when the households cannot trade assets after receiving the shocks moreover it can exist when the friedman rule is available and when the restriction is only obeyed by government agents

on the optimality of the friedman rule in a new monetarist model we study a monetary model in which buyers choose search intensity and prices are considered as given in a decentralized market we indicate that the friedman rule may not be optimal

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 in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

on a simple rule for the optimal inflation rate in second best taxation abstract the optimal inflation rate is analyzed in the framework of dynamic second best with endogenous factor prices it is shown that when the marginal excess burden of taxation is relatively small the optimal inflation rate is approximated by a simple rule the paper also analyzes the robustness of this rule to the specification of the model money as an input in utility or production

optimal policy in an economy with human capital where money is essential abstract this paper investigates optimal policies in an economy with human capital where money is essential in trades of consumption goods to this end we extend the lagos and wright 2005 economy to incorporate human capital accumulation i since human capital accumulation is distorted by search friction as well as bargaining friction monetary policy alone cannot achieve the first best allocation in our preferred setting ii subsidies to human capital investment are required for the first best optimum iii the friedman rule is still optimal

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

search for a monetary propagation mechanism abstract this paper examines a monetary propagation mechanism in an economy where exchanges in goods and labor markets involve costly search it is shown that an increase in the money growth rate increases steady state employment and output when the money growth rate is low but reduces steady state employment and output when the money growth rate is already high the model produces persistent hump shaped responses in employment and output to money growth shocks even when the shocks have no persistence the model also generates desirable features in job vacancy sales inventory and the velocity of money all these features emerge here in an economy with perfectly flexible prices and wages journal of economic literatureclassification numbers e40 e30

on the efficiency of monetary exchange how divisibility of money matters abstract we use alternative assumptions about the divisibility of goods and money and the ability of agents to use lotteries on money to investigate to what extent the indivisibility of money is the cause for the typically inefficient production and consumption decisions in search theoretic models of money our framework potentially generates three types of inefficiencies the no trade inefficiency where no trade takes place even though it would be socially efficient to trade and the too much trade and too little trade inefficiencies where the quantities produced and exchanged are either larger or smaller than what the solution to a social planner s problem would mandate it is shown that while the no trade and the too much trade inefficiencies are caused by the indivisibility of money the too little trade inefficiency remains even when money is divisible unless it is sufficiently valued

frictional goods markets theory and applications we analyse dynamic general equilibrium models with more or less directed search by informed buyers and random search by uninformed buyers this nests existing specifications and generates new insights a quantitative application concerns the welfare cost of inflation which is known to be quite high with pure random search and low with pure directed search our calibration implies the impact of inflation is fairly low in part because in addition to the usual costs it provides benefits by more heavily taxing high price sellers that inefficiently profit from exploiting the uninformed other applications analyse analytically and numerically changes in credit conditions and information

the dynamics of superior performance among the largest firms in the global oil industry 1954 2008 this study combines quantitative and qualitative research methods to contribute to the understanding of the dynamics of superior performance among the largest firms in the global oil industry during the 1954 2008 period by identifying new stylized facts the combination of parametric and non parametric analysis displays cyclical patterns of the different aspects of performance dynamics appreciative theorizing through qualitative historical analysis uncovers causal explanations that are based on an interplay of corporate industrial and institutional change that leads to a succession of four competitive regimes

bargaining and the value of money abstract search models of monetary exchange have typically relied on nash 1950 the bargaining problem econometrica 18 155 162 bargaining or strategic games that yield an equivalent outcome to determine the terms of trade by considering alternative axiomatic bargaining solutions in a search model with divisible money we show that the properties of the bargaining solutions do matter both qualitatively and quantitatively for questions of first degree importance in monetary economics such as i the efficiency of monetary equilibrium ii the optimality of the friedman rule and iii the welfare cost of inflation

inventory accumulation in a search based monetary economy abstract this paper explores the implications of a search based model of money for the linkage between steady state inventory accumulation inflation and welfare because individual traders in the search economy do not internalize the positive effects inventory accumulation and search effort have on the aggregate economy they are too low relative to social efficiency it is established that a tax on money balances can alleviate these externalities and improve aggregate welfare it does so by i directly increasing the optimal search intensity choices of the individual trader and ii stimulating the accumulation of inventories through a mundeil tobin type effect an increase in the equilibrium level of inventory accumulation also positively affects search effort the implications for optimal monetary policy are discussed

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 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

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

friedman meets hosios efficiency in search models of money this article studies optimal monetary policy in an economy with endogenous search decisions we show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades the friedman rule eliminates the first inefficiency and the hosios rule the second a monetary equilibrium attains the social optimum if and only if both rules are satisfied when they cannot be satisfied simultaneously optimal monetary policy achieves only the second best we analyse the conditions under which the second best monetary policy exceeds the friedman rule

sequential markets and the suboptimality of the friedman rule a cash in advance model with sequential markets is constructed where unanticipated monetary injections are nonneutral and can potentially produce large liquidity effects however if the monetary authority adheres to an optimal money rule money should not respond to unanticipated shocks so that a friedman rule is suboptimal and the monetary authority does not exploit the liquidity effect quantitatively the model can generate variability in money and nominal interest rates close to what is observed and can produce data with no obvious evidence of the existence of liquidity effects

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

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment

price level targeting and stabilization policy we construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy prices are fully flexible and money is essential for trade our main result is that if the central bank pursues a price level target it can control inflation expectations and improve welfare by stabilizing short run shocks to the economy the optimal policy involves smoothing nominal interest rates that effectively smooths consumption across states

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

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