Pairwise trade, asset prices, and monetary policy

Ed Nosal and Guillaume Rocheteau

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 1, 1-17

Abstract: We construct a search-theoretic model where fiat money coexists with real assets, and all assets can be used as a media of exchange. The terms of trade in bilateral matches are determined by a pairwise Pareto-efficient pricing mechanism. We do not have to appeal to exogenous liquidity constraints to generate asset prices that are consistent with the following facts: (i) fiat money can be valued despite being dominated in its rate of return; (ii) real assets with identical dividend flows can have different rates of return; and (iii) an increase in inflation raises asset prices, lowers their returns, and widens the rate-of-return differences between assets. On the normative side we show that there is a range of inflation rates that implement the first-best allocation.

Keywords: Search; Money; Bilateral trades; Inflation; Asset prices (search for similar items in EconPapers)
JEL-codes: E40 E50 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (26)

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Working Paper: Pairwise Trade, Asset Prices and Monetary Policy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:1:p:1-17

DOI: 10.1016/j.jedc.2012.07.005

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