Working Paper(17-013E) "Choice of market in the monetary economy"

This is working paper.

We investigate a monetary model with two kinds of decentralized markets and where each agent stochastically chooses the market in which to participate. In one market, the pricing mechanism is competitive, whereas in the other, the terms of trade are determined by Nash bargaining. We show the sub-optimality of the Friedman rule, which is already demonstrated by existing models, where the setting of search externality in the competitive market is not completely satisfactory. We show this result in the more plausible setting when the competitive market does not have a search externality.

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