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A new suggestion for simplifying the theory of money

Kenneth Burdett, Alberto Trejos and Randall Wright

Journal of Economic Theory, 2017, vol. 172, issue C, 423-450

Abstract: We propose a new search-theoretic model of monetary exchange with indivisible assets, based on price posting instead of bargaining, and incorporating noisy search. This yields some familiar results, plus a lot more. The model admits multiple steady states due to the self-referential nature of liquidity. It admits cyclic, chaotic and stochastic equilibria, and compared to bargaining versions, the dynamics are more general and have better microfoundations. It generates price dispersion, with interesting efficiency implications, plus sticky prices and rational inattention. Parametric examples yield closed-form solutions. Based on these results, we suggest this should become a benchmark model in monetary economics.

Keywords: Money; Search; Dynamics; Dispersion (search for similar items in EconPapers)
JEL-codes: D83 E50 E44 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jetheo:v:172:y:2017:i:c:p:423-450