Abstract
The connection between money and the terms of trade is examined in a simple competitive monetary equilibrium model with flexible prices. Money is held for transaction purposes. The cost of financial transactions induces households to visit financial intermediaries only occasionally. Different households visit the financial intermediaries at different times. This ensures that open market operations which raise the money supply in country 1 increase output in both countries. This increase is biggest in country 1 under flexible exchange rates and biggest in country 2 under fixed rates. The terms of trade of country 1 worsen only under flexible rates.
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