Matching Model Of Money Research Articles

Indeterminacy in a matching model of money with productive government expenditure

This study explores the effects of inflation on economic growth in a two-sector monetary search-and-matching model with productive government expenditure. We find that when labor intensity of production in the centralized market is below a threshold, the economy features a unique balanced growth path along which inflation reduces growth so long as capital intensity of production in the decentralized market is positive. When labor intensity in the centralized market is above the threshold however, the economy may feature multiple balanced growth paths. Multiple equilibria arise when the matching probability in the decentralized market is above a threshold. In this case, the high-growth equilibrium features a negative effect of inflation on economic growth whereas the low-growth equilibrium may feature a negative, a positive or a non-monotonic effect of inflation on growth. When the matching probability is above the threshold but not too high, the low-growth equilibrium is locally determinate whereas the high-growth equilibrium is locally indeterminate and subject to sunspot-driven business cycles around it. Finally, when the matching probability is sufficiently high, both equilibria are locally determinate, and hence, either equilibrium may emerge in the economy.

Endogenous Matching and Money with Random Consumption Preferences

Abstract Current money matching models employ either random matching or endogenous matching processes, both of which oversimplify the problem. We maintain that, although most economic interactions are intentional, some randomness remains. We offer an endogenous matching model of money with random consumption preferences. Our model preserves the intentionality of economic interactions while leaving scope for chance. We identify the conditions for potential monetary and nonmonetary equilibria and compare them to those of other endogenous matching and random matching models.

Endogenous Matching and Money with Random Consumption Preferences

Current money matching models employ either random matching or endogenous matching processes, both of which oversimplify the problem. We maintain that although most economic interactions are intentional, randomness still exists in consumption preferences. We offer an endogenous matching model of money with random consumption preferences. Our model preserves the intentionality of economic interactions while leaving scope for chance. We compare the potential monetary and nonmonetary equilibria to other endogenous matching and random matching models. We then consider the effects of government transaction policy and find that, consistent with earlier studies, government policy can prevent nonmonetary equilibria and create monetary equilibria.

Banking in a Matching Model of Money and Capital

We introduce banks in a model of money and capital with trading frictions. Banks offer demand deposit contracts and hold primary assets to maximize depositors’ utility. If banks’ operating costs are small, banks reallocate liquidity eliminating idle balances and improving the allocation. At moderate costs, idle balances are reduced but not eliminated. At larger costs, banks are redundant. A central bank policy of paying interest on bank reserves can reverse inflation’s distortionary effects, and increase welfare, but only when costs are small. The threshold levels of banks’ costs increase with inflation, suggesting inflation and banks’ utilization are positively associated.

Banking in a Matching Model of Money and Capital

We introduce banks in a model of money and capital with trading frictions. Banks offer demand deposit contracts and hold primary assets to maximize depositors’ utility. If banks’ operating costs are small, banks reallocate liquidity eliminating idle balances and improving the allocation. At moderate costs, idle balances are reduced but not eliminated. At larger costs, banks are redundant. A central bank policy of paying interest on bank reserves can reverse inflation's distortionary effects, and increase welfare, but only when costs are small. The threshold levels of banks’ costs increase with inflation, suggesting inflation and banks’ utilization are positively associated.

Discussion of “Banking in a Matching Model of Money and Capital”

THE PAPER BY BENCIVENGA AND CAMERA (2011, this issue) studies how banks can improve the allocation of resources in an environment where trading frictions make money useful for certain types of exchange. Its starting point is the observation that the random nature of trading opportunities commonly used in modern monetary models is structurally similar to a type of liquidity-preference uncertainty that appears in the banking literature. It seems natural, therefore, to ask what insights can be gained by combining these separate strands of research. The paper presents a model of decentralized trade in which banks arise endogenously as an arrangement for efficiently distributing cash to agents when they have attractive buying opportunities. It then studies the relationship between inflation and the functioning of the banking system, as well as the effects of a central bank policy of paying interest on bank reserves. The paper is part of an important research agenda that aims to study financial institutions in general equilibrium models where money plays an explicit role. The model in the paper builds on that in Lagos and Wright (2005), where agents alternate between trading in centralized and decentralized markets and the information structure is such that decentralized trade requires the use of money. Agents can hold their wealth in either money or capital; capital typically offers a higher rate of return but cannot be used to purchase goods in decentralized trade. When making portfolio adjustments in the centralized market, an agent is unsure what trading opportunities will be available to her in the subsequent decentralized market and, hence, how much money she will want to hold. The banking literature that began with Bryant (1980) and Diamond and Dybvig (1983) showed how an institution that resembles a bank can be welfare enhancing when agents face a similar type of uncertainty. The models in this literature were written entirely in real terms, however, which limits their ability to address monetary issues such as the effects of inflation. Bencivenga

Discrete time dynamics in a random matching monetary model

Under take-it-or-leave-it offers, dynamic equilibria in the discrete time random matching model of money are a “translation” of dynamic equilibria in the standard overlapping generations model. This formalizes earlier conjectures about the equivalence of dynamic behavior in the two models and implies the indeterminacy of dynamic equilibria in the random matching model. As in the overlapping generations model, the indeterminacy disappears if an arbitrarily small utility to holding money is introduced. We introduce a different pricing mechanism, one that puts into sharp focus that agents are forward-looking when they interact.

Output Degeneracy of Ex Post Individually Rational Optima in a Matching Model of Money

I study optimal allocations in versions of the Trejos-Wright [1995] and Shi [1995] models with indivisible money and bounded individual holdings. The objective is expected discounted utility and the feasible set consists of all distributions of money holdings and trades in meetings which are mutually consistent and ex post individually rational. This problem is described in Deviatov and Wallace [2001], who study the e¤ects of money creation in that model. Although they show that money creation can be helpful, they do not describe optima because their problem is not ...nite dimensional. Here I show, under a mild additional restriction on the set of allocations, that the optimum has no randomization over output and, therefore, that the feasible set can be limited to a ...nite dimensional space. ¤I am grateful to Neil Wallace, Dmitry Dolgopyat, Sergei Izmalkov, and to participants of Cornell Penn State Macro Workshop (April 2001) and Conference on Monetary Economics at the Federal Reserve Bank of Cleveland (August 2001) for their most valuable comments. All remaining errors are solely my responsibility. yAddress for correspondence: 608 Kern Graduate building, Department of Economics, The Pennsylvania State University, University Park, PA 16802-3306; e-mail: .