Bargaining and the value of money

Guillaume Rocheteau () and Christopher Waller ()

No 501, Working Paper from Federal Reserve Bank of Cleveland

Abstract: Search models of monetary exchange have typically relied on Nash (1950) bargaining or strategic games that yield an equivalent outcome to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions, whereas under strongly monotonic solutions such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman Rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition.

Keywords: Money; Monetary policy; Game theory (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2005
View list of references View citations in EconPapers

Downloads: (external link)
http://www.clevelandfed.org/Research/Workpaper/2005/Wp0501.pdf (application/pdf)

Related works:
Journal Article: Bargaining and the value of money (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedcwp:0501

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Cleveland
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().