Frictions in the Exchange Process and the Essentiality of Money
| Authors | |
|---|---|
| Year of publication | 2010 |
| Type | Article in Proceedings |
| Conference | Mathematical Methods in Economics 2010 |
| MU Faculty or unit | |
| Citation | |
| Field | Economy |
| Keywords | Essentiality of money Contangious equilibrium Repeated games |
| Description | Modern monetary literature is dealing with a question: "What makes money essential?" Whereas, money is essential if it improves the efficiency of resource allocation relative to an economy without money. More concretely it is looking for some frictions in the exchange process that are able to explain the essentiality of money. The common answer is that the enviroment characterized by the absence of double coincidence of wants, imperfect monitoring of past actions and anonymity is neccessary and sufficient for money to be essential. The purpose of this paper is to investigate this claim. I provide a game-theoretical model based on the random matching model of Kiyotaki and Wright (1993). Although all of the above mentioned frictions are present in the model, money need not to be essential if the agents implement a social enforcement rule. Moreover, I will show, that money becomes essential if agents have private information about their preferences. Therefore we can conclude that money serves also as a device that forces agents to reveal their true preferences. |