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Working Paper
Playing with Money
Experimental studies in monetary economics usually study infinite horizon models. Yet, the time constraints of the laboratory sessions in which these models are conducted create finite horizons that imply monetary equilibria cannot exist. Moreover, laboratory subjects do not treat the probabilistic termination rule typically used in a manner consistent with the discount factor that the rule is intended to replace. Thus, it is unclear whether these experiments evaluate subjects' use of money to ameliorate trading frictions as an equilibrium phenomenon, their inability to understand backward ...