A Divisible Search Model of Fiat Money

Shouyong Shi

Econometrica, 1997, vol. 65, issue 1, 75-102

Abstract: This paper extends the Kiyotaki-Wright model of fiat money to allow for divisible money and goods. By severing the artificial link in the Kiyotaki-Wright model between the money supply and the number of money holders, the author shows that money is neutral but not superneutral. Money growth changes the composition of agents in the market and can increase agents' probability of having a successful match. This trading opportunity effect of money growth can dominate its conventional negative effect on real money balances and so can imply a positive optimal money growth rate.

Date: 1997
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Working Paper: A Divisible Search Model of Fiat Money (1996)
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