Get access

Money, Bargaining, and Risk Sharing


  • We would like to thank the participants of the FRB Cleveland and Journal of Money, Credit, and Banking conference on “Liquidity in Frictional Markets” for their comments. We are particularly grateful to our discussant, Manolis Galenianos, and to two anonymous referees for their comments.


We investigate the dual role of money as a self-insurance device and a means of payment when perfect risk sharing is not possible, and when the two roles of money are disentangled. We use a variant of Lagos–Wright (2005) where agents face a risk in the centralized market (CM): in the decentralized market (DM) money’s main role is as a means of payment, while in the CM it is as a self-insurance device. We show that state-contingent inflation rates can improve agents’ ability to self-insure in the CM, thereby improving the terms of trade in the DM. We then characterize the optimal monetary policy.

Get access to the full text of this article