Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium

Authors

  • Guillaume Rocheteau,

    1. 1 Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101-1387, U.S.A., and Australian National University; Guillaume.Rocheteau@clev.frb.org
      and
      2Dept. of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104, U.S.A.; rwright@econ.upenn.edu.
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  • and 1 Randall Wright 2

    1. 1 Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101-1387, U.S.A., and Australian National University; Guillaume.Rocheteau@clev.frb.org
      and
      2Dept. of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104, U.S.A.; rwright@econ.upenn.edu.
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    • This paper has benefited from repeated discussions with Ricardo Lagos and Matthew Ryan. We also thank Ruilin Zhou, a co-editor, three anonymous referees, and participants at the Society for Economic Dynamics in Paris, the Canadian Macro Study Group in Toronto, the Federal Reserve Banks of Cleveland, Minneapolis, and Philadelphia, the Universities of Chicago, Northwestern, Victoria, Paris II, Penn, Yale, MIT, Michigan, Iowa, and Essex for comments. We are grateful to the Summer Research Grant scheme of the School of Economics of the Australian National University, the National Science Foundation, the Central Bank Institute at the Federal Reserve Bank of Cleveland, and ERMES at Paris II for research support.


Abstract

We compare three market structures for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We also extend work on the microfoundations of money by allowing a general matching technology and entry. We study how equilibrium and the effects of policy depend on market structure. Under bargaining, trade and entry are both inefficient, and inflation implies first-order welfare losses. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation may actually improve welfare. Under posting, the Friedman rule yields the first best, and inflation implies second-order welfare losses.

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