Abstract
People have long been trading in a “monetary” way. This persistence of monetary trading suggests that it might be an efficient trading mechanism. We formalize this intuition in a random-matching, absence-of-double-coincidence-of-wants environment. The record-keeping technology is operated by an information-processing center which summarizes and updates individuals’ past trading behavior in a binary variable. A trading mechanism consists of an updating rule and an individual trading behavior rule. To capture the difficulties in collecting and processing information about others’ past behavior, we assume that the center faces costs, both fixed and variable, to operate. We show that (1) any non-autarkic equilibrium trading mechanism is, in terms of aggregate variables (such as consumption and frequency of trade), observationally equivalent to a monetary trading mechanism and (2) any non-autarkic optimal equilibrium trading mechanism is a monetary trading mechanism.
Highlights
Throughout time the means of exchange have changed considerably
Our view is that monetary trading would not have persisted if there is a more efficient trading mechanism; the contribution of this paper is to identify, in the setting on which most recent monetary models are built, an economically meaningful constraint on trading mechanisms that renders monetary trading as the most efficient trading mechanism among those that satisfy it
We provided a setting where any optimal equilibria are indistinguishable from monetary trading
Summary
Throughout time the means of exchange have changed considerably. Many commodities have been used as media of exchange, including chocolate, shells, butter, salt, and, paper. Recent technological developments led to a substantial increase in. I wish to thank Luis Araujo, Gabriele Camera, Christian Hellwig, Cyril Monnet, Mikhail Safronov, Pedro Teles, three anonymous referees and seminar participants at the Bank of Portugal, University of Cambridge, Midwest Macroeconomics Meetings (Madison, Spring 2018) and European Workshop on General Equilibrium Theory (Paris, 2018) for very helpful comments. Special thanks to Narayana Kocherlakota and Ket Richter, advisors of my PhD dissertation (Carmona 2002a), from which this paper evolved. Financial support from the British Academy and the Leverhulme Foundation (under Grant SG150098) is gratefully acknowledged.
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