Coalition‐Proof Trade and the Friedman Rule in the Lagos‐Wright Model

Abstract

The Lagos-Wright model a monetary model in which pairwise meetings alternate in time with a centralized meeting has been extensively analyzed, but always using particular trading protocols. Here, trading protocols are replaced by two alternative notions of implementability: one that allows only individual defections and one that also allows cooperative defections in meetings. It is shown that the rst-best allocation is implementable under the stricter notion without taxation if people are su ciently patient. And, if people are free to skip the centralized meeting, then lump-sum taxation used to pay interest on money does not enlarge the set of implementable allocations. (100 words)

Money and Credit Redux

“…9 This class of mechanisms includes standard bargaining solutions, as discussed below. It also includes competitive price taking, which can be motivated by reinterpreting DM trade as multilateral, as in Rocheteau and Wright (2005), as well as creative mechanisms like the one designed by Hu, Kennan, and Wallace (2009). In terms of content, (9) says this: a buyer gets the efficient quantity q * and pays some amount p * = v(q * ), determined by the mechanism, as long as p * ≤ L; otherwise, he goes to the limit p = L, and gets q = v −1 (L) < q * .…”

“…To have money and credit both useful, neither should be perfect: if debt were unconstrained, money is inessential; and if monetary policy were unconstrained, by which we mean i can be set low enough, credit can be inessential. Even without credit, for some mechanisms (e.g., Walrasian pricing or Kalai bargaining) we get q * iff i = 0, while for others (e.g., the ones in Hu, Kennan, and Wallace (2009) or Gu and Wright (2015)) we can get q * for i > 0 but only if i is not too high. Hence, it is of interest to establish an endogenous lower bound on the nominal rate, to give credit a chance, just like establishing an endogenous upper bound on debt gives money a chance.…”

“…By essential we mean that the set of equilibria, or the set of incentivefeasible allocations, is bigger or better with an institution than without it. 3 By credit conditions, in the baseline model, we mean debt limits, although extensions also consider the monitoring of default and the pledgeability of assets. In monetary equilibrium, tightening the debt limit is neutral-it has no impact on allocations or welfare-and, as a special case, shutting down credit does not matter, making it inessential.…”

“…On that, see Shi (2006), Wallace (2001Wallace ( , 2010, Williamson and Wright (2010b), Nosal and Rocheteau (2011), and Lagos, Rocheteau, and Wright (2015). 3 The notion that it is important to ask whether money is essential goes back to Frank Hahn. For research that pursues this idea, and also discusses the essentiality of credit, bonds, banking, or intermediation, see Townsend (1987Townsend ( , 1988, Kocherlakota (1998), Wallace (2001Wallace ( , 2010, Mills (2007), Aliprantis, Camera, and Puzzello (2007), Araujo and Minetti (2011), Berentsen and Waller (2011), Araujo, Camargo, Minetti, and Puzzello (2012), Gu, Mattesini, Monnet, and Wright (2013a), Araujo and Hu (2014), and Nosal, Wong, and Wright (2014).…”

Money as a Unit of Account

“…In most of the paper, we employ a normative approach that derives properties of second-best allocations, rather than spell out a particular game that describes trade in the economy. A number of papers on media of exchange also follow this strategy, for example Kocherlakota (1998Kocherlakota ( , 2002, Cavalcanti and Wallace (1999), Hu and Rocheteau (2013), and Hu, Kennan, and Wallace (2009). A difference in approach is that those papers tend to make no a priori restrictions on contracts.…”