Comment on "Search, Money, and Capital: A Neoclassical Dichotomy"

Abstract

Before giving my general comments on the paper, I think that it would be useful to describe the evolution of monetary search models for those who have not followed recent developments in the literature. In this way, one has a better sense of the contribution made by Aruoba and Wright (2003, this issue of JMCB). Most people are familiar with the basic monetary search model developed by Kiyotaki and Wright (1989, 1993), and for many this may be the extent of their knowledge of money search models. In this first generation of models, goods and money are indivisible and agents can only hold one unit of goods or money. The key contribution of the models was to carefully describe the decentralized trading environment that gives rise to a double coincidence of wants problem and to endogenize the decision to accept money as payment for goods and services. In all search models, assumptions regarding anonymity of trading histories and imperfect record keeping mean that credit is not feasible, thus money is essential for trade, i.e., better allocations can be achieved through the use of money than without it. While analyzing the decision to accept money as a medium of exchange does not hinge on indivisibilities or inventory restrictions, other questions such as how