Bargaining and the value of money

Guillaume Rocheteau and Christopher Waller

No 501, Working Papers (Old Series) 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)
Date: 2005
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (11)

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Journal Article: Bargaining and the value of money (2007)
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DOI: 10.26509/frbc-wp-200501

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