Money and the gains from trade*

This article studies the role of money in environments where in each meeting there is a double coincidence of real wants. Traders who meet at random finance their purchases through current production, the sale of divisible money or both. It is shown that in the absence of valued money if traders have asymmetric tastes for each other's good, they produce and exchange socially inefficient quantities. With valued money, however, traders exchange efficient quantities if the asymmetry of tastes is not too large. It is shown that the gains from trade in the monetary economy are strictly greater than those in the corresponding barter economy, that the Friedman rule holds, and that the allocation of resources in the monetary economy converges to the allocation in the barter economy as the growth rate of the money supply is increased.     

Money and Information

This paper investigates the role of money in markets in which producers have private information about the quality of the goods they supply. When the fraction of high-quality producers in the economy is given, money promotes the production of high-quality goods, which improves the quality mix and welfare unambiguously. When this fraction is endogenous, however, we find that money can decrease welfare relative to the barter equilibrium. The origin of this inefficiency is that money provides consumption insurance to low-quality producers, which can result in a higher fraction of low-quality producers in the monetary equilibrium. Finally, we find that most often agents acquire more costly information in the monetary equilibrium than in the barter equilibrium. Consequently, money is welfare-enhancing because it promotes useful production and exchange, but not because it saves information costs.     

BARTER'S ROLE IN THE MONEY–INCOME RELATIONSHIP

Abstract.  This paper deals with a reassessment of the money–income relation and predictability of changes in GDP with innovations in money in the presence of barter. Organized barter as a method of transaction, through barter exchanges, has been growing rapidly in the US economy. With the introduction of computers and the use of a credit system which allows non-simultaneous transactions, barter exchanges have found new opportunities to offer an alternative to monetary transactions. Analysis of data from the 1974–96 period provides some evidence suggesting that inclusion of barter in the output function improves the marginal predictability of money.     

F.A. von Hayeks theorie der geldwirtschaft in neuerer sicht

This essay tries to reconstruct the analytical framework of F.A. von Hayek's theory of a monetary economy. In Hayek's analysis the concept of neutral money only serves to determine a point of reference which is derived from a model of ideal barter. According to Hayek's programme monetary theory should develope by giving up the implicite analogy to a barter economy and by analysing instead a monetary economy as a phenomenon of its own.The approach of the new classical macroeconomics is critically examined from this point of view. It is shown that the coordination of plans and expectations implied by this approach is incompatible with decentralized monetary transactions. This type of model therefore does not stand up to the demands formulated in Hayek's programme.     

Bargains,Barter, and Money

We examine a search money model in which there is a symmetric coincidence of wants in all barter matches. However, when bargaining outcomes are asymmetric across matches, the barter economy is inefficient. Then a robust monetary equilibrium exists provided that money holders enjoy adequate bargaining terms. Fiat money may be welfare improving. In contrast to the literature, it is the asymmetry in bargains across matches rather than asymmetry in demands that generates these results. Journal of Economic Literature Classification Numbers: C78, E40.     

THE SUPERIORITY OF MONETARY OVER BARTER EXCHANGE: EXPERIMENTAL RESULTS AND POLICY IMPLICATIONS

William Stanley Jevons suggested that monetary exchange is socially superior to barter exchange because agents' optimization is simplified by the use of money. We experimentally study how subjects perform under monetary and barter exchange and find that a majority of subjects achieve a higher utility level in the monetized economy. The individual choices are statistically analyzed in order to track important elements of suboptimal decision making like the tendency to under‐ or over‐react to price signals. Our laboratory findings indicate that, at a minimum, government may have a role in promoting a common unit of account.     

Trading horizons and the value of money

This paper shows that fiat money can be feasible and essential even if the trading horizon is finite and deterministic. The result hinges on two features of our model. First, individual actions can affect the future availability of productive resources. So, agents may be willing to sell for money, even if on that date they have no reason to accept it. This makes monetary trade feasible in all preceding dates. Second, agents are anonymous and direct their search for partners. So, gift-giving arrangements may be prevented because agents can misrepresent their consumption needs. This makes money essential in exploiting any gains from specialization and trade.     

Barter in the Russian Economy: Classifications and Implications (Evidence from Case Study Analyses)

This article addresses Russia's barter economy. Using interview data, it examines the mechanics of barter settlements and classifies the main types of non-monetary transactions. The major reason for barter is lack of a competitive monetary system. In the 1990s barter represented a specific vehicle to perform settlements. Barter itself is not a way to evade taxes or to defraud enterprises of assets. But barter changed the motivation of enterprises and led to systematic distortion of accounting data. The low transparency of the barter economy creates barriers for investment and restructuring. The barter economy is an insider's economy. The lack of affiliated entity regulation and mechanisms for disclosure of transactions with related parties stimulates insiders to criminal application of barter and monetary surrogates. Barter has become a profitable business for a number of important economic agents including financial intermediaries affiliated with top managers of the biggest privatised enterprises and government agencies.     

The Conceptual Flaw in the Microeconomic Foundations of Dynamic Stochastic General Equilibrium Models

First-generation dynamic stochastic general equilibrium (DSGE) models have been criticized for their lack of financial markets but, more perceptively, for their barter properties. This note explains why the second of these criticisms is fundamental. All DSGE models are built on frictionless, perfect barter, Walrasian microeconomic foundations. Introducing money and banks into such models converts them into a ‘friction’ contra the fundamental principle that monetary exchange is more efficient than barter. This insoluble difficulty with the microeconomic foundations of DSGE models arises because theorists ignore the Hahn problem that applies to all monetary models based on Walrasian general equilibrium (GE) microeconomic foundations. The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to logical error; the misuse of language that produces invalid conclusions. A second-generation DSGE model that is intended to increase understanding of financial crises is then examined to show that it suffers from the Hahn problem; it converts banking and financial markets into ‘frictions’, and words and economic concepts take on different meanings. That renders the new DSGE model impossible to interpret or use as a basis for advice on monetary policy.     

Asymmetric information, financial intermediation, and business cycles

Summary. This incorporates a debt contracting problem with asymmetric information into a standard monetary business cycle model. The model incorporates a limited participation assumption in order to induce a liquidity effect of monetary shocks and propagate monetary disturbances. The model economy shows that a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Asymmetric information amplifies the response of capital to the money supply shock, but does not propagate them in other ways. When the monetary shock is an innovation in reserve requirements, it induces a persistent response of the economy. Received: March 20, 1998; revised version: 1 April 1998     

Money non-neutrality in a Rational Belief Equilibrium with financial assets

Summary. In Rational Beliefs Equilibria money is generically non-neutral. Given the expectational perspective proposed by the Theory of Rational Belief Equilibrium, we show that one of the most important factors in the emergence of money non-neutrality is played by Endogenous Uncertainty. This, in contrast to the Rational Expectations results of money neutrality and policy ineffectiveness, leads to a scenario in which monetary policy has an impact on the real economy and price volatility. The heterogeneity of beliefs together with the distribution and intensity of agents' states of optimism/pessimism can amplify the real effect of monetary policy and/or generate endogenous fluctuations in the economy which are not explained by any exogenous shock. We claim that money non-neutrality is mostly an expectations driven phenomenon. Indeed, additional assumptions of asymmetry of information and/or unanticipated monetary policy are not needed to explain the real effect of monetary policy as it is customary in the New Classical Theory. Received: May 30, 2000; revised version: December 28, 2000     

Optimal monetary policy: distribution efficiency versus production efficiency

This paper investigates the trade‐off between distribution effect and production effect of monetary policy when there exist unobservable idiosyncratic liquidity shocks. In the absence of risk‐sharing arrangements such as a credit market, monetary policy serves to provide ex post insurance to smooth consumption. Specifically, issuing interest‐bearing bonds restores credit transactions on money through bond‐money exchanges. Such a policy has a positive distribution effect, but the resulting inflation hampers production efficiency. It is demonstrated that the trade‐off between distribution efficiency gain and production efficiency loss would result in net welfare enhancement if consumers are relative‐risk‐averse enough.     

The robustness of optimal equilibrium among overlapping generations

Summary. We combine and strengthen optimality and robustness theorems for the overlapping-generations model of money. Roughly, we find a Pareto-optimal monetary equilibrium of a generic stationary economy that is near an optimal monetary equilibrium of each nearby non-stationary economy. Since the nearby equilibria are monetary, the general problem of macroeconomic stabilization reduces to maintaining the money supply. And since the nearby equilibria are optimal, stabilization is socially desirable. Received: October 27, 1997; revised version: March 25, 1998     

Existence of a monetary steady state in a matching model: divisible money

Existence of a monetary steady state is established in a random matching model with divisible goods, divisible money, an arbitrary bound on individual money holdings, and take-it-or-leave-it offers by consumers. The monetary steady state shown to exist has nice properties: the value function, defined on money holdings, is strictly increasing and strictly concave, and the distribution over money holdings has full support. The approach is to show that the “limit” of the nice steady states for indivisible money, existence of which was established in an earlier paper, as the unit of money goes to zero is a monetary steady state for divisible money. For indivisible money, the marginal utility of consumption at zero was assumed to be large; for divisible money it is assumed to be large and finite.     

Does commodity money eliminate the indeterminacy of equilibrium?

Previous studies have shown that a random-matching model with divisible fiat money and without constraint on agents’ money inventories possesses a continuum of stationary single-price equilibria. Wallace (J. Econom. Theory 81 (1998) 223) conjectures that the indeterminacy can be eliminated by the use of commodity money. Instead, I find that in a similar random-matching model with dividend-yielding commodity money, a continuum of stationary single-price equilibria exists when the utility of dividend is not too high. This result casts doubt on the conventional belief that the indeterminacy of monetary equilibrium is be caused only by the nominal nature of money.     

On the coexistence of money and higher-return assets and its social role

This paper adopts mechanism design to investigate the coexistence of fiat money and higher-return assets. We consider an economy with pairwise meetings where fiat money and risk-free capital compete as means of payment, as in [28]. The trading mechanism in pairwise meetings is chosen among all individually rational, renegotiation-proof mechanisms to maximize society?s welfare. We show that in any stationary monetary equilibrium capital commands a higher rate of return than fiat money.     

The Significance of the Monetary Context of Economic Behavior

The dominant paradigm in economics views economic behavior as allocative activity in a neutral, C-M-C' economy. As a consequence, money is treated as a veil that is inessential to the real functioning of the economic system. This paper argues that one of Keynes's fundamental insights is the significance of the monetary context of economic behavior. This insight has been developed by the post-Keynesian theory of money as a "time-machine vehicle" that provides the causal link between uncertainty and unemployment. The Circuitist theory of money as the means of final payment provides a complementary radical perspective on the significance of the monetary context. This paper investigates the methodological and theoretical implications of these radical monetary theories and assesses their contribution towards the development of a general theory of a monetary production, M-C-M' economy.     

货币政策组合规则

本文建议在泡沫高涨时将货币政策由利率规则转为货币量规则。在本文设定的CIA模型经济中，外生泡沫通过金融渠道对经济发生影响。本文证实，即使是遵循了泰勒原则的利率规则也会因为对融资活动的增长提供相应的货币支持而实际上起到助长泡沫经济的作用；而货币量规则由于对货币供应的控制而能起到缩短并稳定泡沫经济影响的效果。本文的模拟实验表明，在大型泡沫经济中将利率规则与货币量规则组合使用能取得更好的宏观经济成果。同时，将不同规则进行组合使用的思想在货币政策的研究中是新颖的，本文还发展了模型对接的技术处理方法。     

An empirical investigation of monetary interaction in the Korean economy

This paper conducts an econometric investigation of monetary interaction in the Korean economy over the past two decades. The study pays close attention to a critical role played by broad money and an interest rate term spread in the economy. A vector autoregression reveals two cointegrating relationships, both of which are consistent with macroeconomic theory: the first relationship corresponds to a broad money demand function, while the second represents a monetary policy rule function. The cointegrated system is then reduced to a vector equilibrium correction system, which characterizes the interaction between money demand and monetary policy rule. It is also demonstrated that the preferred model is a reliable forecasting device, suggesting that the broad money contains information about the real economy in the future.     

Incentives to produce quality and the liquidity of money

Summary I study a version of the Williamson-Wright (1994) model that results from ruling out direct barter. Although one can no longer argue that the value of money comes exclusively from private information, one can use the simplified model to address a variety of other issues. In particular, one can characterize analytically the set of equilibria and their properties. One can also analyze the trade-off between providing liquidity to facilitate trade and providing incentives to produce high quality, and address some other issues related to policy and welfare, including the effects of inflation on the incentives to produce high quality.I am grateful to Faruk Gul, Yiting Li, Nicholas Yannelis, an anonimous referee and especially Randall Wright for their input.