Working Paper

Search-Based Models of Money and Finance: An Integrated Approach

Abstract: Many applications of search theory in monetary economics use the Shi-Trejos-Wright model, hereafter STW, while applications in finance use Duffie-Grleanu-Pederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between the literatures, and generates new insights and applications. Even in the special cases of the baseline STW and DGP models, we provide propositions generalizing and strengthening what is currently known, and rederiving some existing results using more tractable arguments.

Keywords: Search; Bargaining; Money; Finance;

JEL Classification: E40; E44;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Working Papers

Publication Date: 2014-03-19

Number: 709

Pages: 47 pages