The Efficiency of Monetary Exchange in Search Equilibrium

Victor E Li

Journal of Money, Credit and Banking, 1997, vol. 29, issue 1, 61-72

Abstract: Search theoretic models of money emphasize monetary exchange as the outcome of economic environments characterized by bilateral trading frictions. This paper analyzes the efficiency of monetary exchange in a search model of fiat money where individuals invest costly effort in the exchange process. Because the optimal effort each individual trader invests in exchange is based upon the private rather than social gains from trade, decentralized monetary equilibria are shown to be inefficient relative to the social optimum. However, for an appropriate division of the gains from trade given to buyers and sellers, it is possible to attain social efficiency. The nature of these search externalities for monetary exchange and their implications for policy are evaluated and discussed. Copyright 1997 by Ohio State University Press.

Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:29:y:1997:i:1:p:61-72

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