On Market Activity and the Value of Money

Abstract

In a random-matching monetary economy, efficient and inefficient sellers choose between home or market production. Since inefficient sellers bargain up their prices, two equilibria may exist-with high or low market participation-depending on extent of heterogeneity and frictions. In equilibrium, the presence of inefficient sellers in the market has two opposing effects. It raises trading frequencies, so it lowers consumption risk, but it lowers the value of money, raising prices. This may reduce trading efficiency. Equilibria with full and limited participation can coexist; when average efficiency is high and agents are patient, limited participation is socially preferable.

Heterogeneity and Lotteries in Monetary Search Models

“…When goods are indivisible we assume that u i (1) = U i and c i (1) = C i where U i > C H > C L for i = H , L . This ordering ensures that there are gains from trade and eliminates market participation issues present in Camera and Vesely (2006). While we do not rank order U H and U L , we do assume that C H / C L > U H / U L .…”

Intensive vs Extensive Margin Tradeoffs in a Simple Monetary Search Model

“…This ensures that there are gains from trade with all sellers who produce the buyer's desired consumption good. It also eliminates market participation issues present in Johri (1999), and Camera and Vesely (2006). Since agents are identical before trading begins, let V 1 denote the value function for an agent holding one unit of money, and V 0 denote the value function for an agent without money.…”

Middlemen in Search Equilibrium*

“…13 13 A paper that does explore the implications of the choice between market and nonmarket production in a micromodel of money is Camera and Vesely (2006). …”