On Money as a Medium of Exchange

Kiyotaki, Nobuhiro; Wright, Randall

doi:10.1086/261634

Cited by 1,073 publications

(726 citation statements)

References 13 publications

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“…11 If the disutility from balance adjustments was nonlinear, it would not be possible to achieve the first-best allocation in both the bilateral and the settlement stage. Thus, linearity is necessary in order to support the first-best in our model.…”

Section: Discussionmentioning

confidence: 99%

A dynamic model of settlement

Koeppl

Monnet

Temzelides

2008

Journal of Economic Theory

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C O N T E N T S 9Non-technical summary AbstractWe investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency. Non-Technical SummarySettlement has three defining properties. It is not a welfare-improving activity by itself. Rather, settlement involves a mere transfer of an asset between participants in order to fulfill the obligations created by previous transactions. Second, it takes place periodically. Finally, settlement gives the opportunity to all participants in the system to start afresh since, after settling their obligations, they are no longer liable to the system. In this paper we employ the dynamic model of a payment system developed in Koeppl, Monnet, and Temzelides (KMT, 2005) in order to study the role of settlement. Our main finding is that settlement is an essential part of an optimal payment system as it enables agents to engage in beneficial transactions that would otherwise not be realized.Our model departs from monetary economics and emphasizes the role of private information in a way related to the dynamic contracting literature. Our model displays the following properties. First, the introduction of periodic settlement rounds does not increase welfare by itself. The increase in welfare is accomplished indirectly through the interplay between settlement and intertemporal incentives. Second, the first-best is supportable only if settlement takes place with a sufficiently high frequency. Finally, payment system participants must exit the settlement stage with identical balances. In this sense, agents start afresh as their history does not affect their future transactions.

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Section: Discussionmentioning

confidence: 99%

A dynamic model of settlement

Koeppl

Monnet

Temzelides

2008

Journal of Economic Theory

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“…[ Figure 2] Whilst the previous experiment does not aim to test any particular theory, in a pair of experiments the Kiyotaki and Wright (1989) model is tested. In this model money arises as a medium of exchange because of trading frictio ns existing in the economy.…”

Section: The Role Of Moneymentioning

confidence: 99%

Bringing macroeconomics into the lab

Ricciuti

2008

Journal of Macroeconomics

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This paper reviews experiments in macroeconomics, pointing out the theoretical justifications, the strengths and weaknesses of this approach. We identify two broad classes of experiments: general equilibrium and singleissue experiments, and emphasize the idea of theory testing that is behind these. A large number of macroeconomic issues have been analyzed in the laboratory spanning from monetary economics to fiscal policy, from international trade and finance, to growth and macroeconomic imperfections. In a large number of cases results give support to the theories tested. We also highlight that experimental macroeconomics has increased the number of tools available to experimentalists.

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“…Members of the former class typically are used to study the origins of the medium of exchange (e.g., Jones, 1976;Niehans, 1978;Kiyotaki and Wright, 1989;Craig and Waller, 2000;Howitt and Clower, 2000), although some are used to study other questions (e.g., Cavalcanti, 1999). For our purposes, these models are not useful because either they are much too stylized to address the questions to be investigated here or they are analytically intractable and require numerical solution.…”

Section: Model Fundamentalsmentioning

confidence: 99%

“…Their models are not suited to studying what characteristics determine which media a particular household will use. Kiyotaki and Wright (1989) and Craig and Waller (2000) restrict the analysis to households that demand only one good, making their models inappropriate for studying how the composition of consumption affects demands for multiple media of exchange. Cavalcanti (1999) allows for two media but restricts a given household a priori to using one or the other of them.…”

Section: Introductionmentioning

confidence: 99%

The Demand for Currency Substitution

Seater

2008

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Demand for Currency Substitution Terms of use: Documents in EconStor may John J. Seater North Carolina State University Abstract:A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory. JEL: E41, E42, E31

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On Money as a Medium of Exchange

Cited by 1,073 publications

References 13 publications

A dynamic model of settlement

A dynamic model of settlement

Bringing macroeconomics into the lab

The Demand for Currency Substitution

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