The Great Capitol Hill Baby Sitting Co-op: Anecdote or Evidence for the Optimum Quantity of Money?

Authors


  • We are grateful for the very valuable comments given by the referee of this journal. KRSH thanks Neil Wallace, seminar participants at Pennsylvania State University and the University of Vienna. TH thanks Aleksander Berentsen and seminar participants at the Universities of Bergen, Bern, Cologne, Maastricht, and Strasbourg. Financial support by the national center of competence in research “Financial Valuation and Risk Management” is gratefully acknowledged. The national centers in research are managed by the Swiss National Science Foundation on behalf of the federal authorities.

Abstract

This paper studies a centralized market with idiosyncratic uncertainty and money as a medium of exchange from a theoretical as well as an experimental perspective. In our model, prices are fixed and markets are cleared by rationing. We prove the existence of stationary monetary equilibria and of an optimum quantity of money. The rational solution of our model, which is based on the assumption of individual rationality and rational expectations, is compared with actual behavior in a laboratory experiment. The theoretical results are strongly supported by this experiment.

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