Money: A Market Microstructure Approach

Abstract

The current discussion about the future of the financial system draws heavily on a set of theories known as the 'New Monetary Economics'. The New Monetary Economics predicts that deregulation and financial innovation will lead to a money less world. This paper uses a market micro-structure approach to show that a common medium of exchange that serves as unit of account will remain a necessary instrument to reduce transaction costs. This finding is supported by empirical evidence from foreign exchange markets.

Keywords: New monetary economics, monetary separation, market microstructure theory, monetary theory, moneyless world, financial innovation

JEL Classification: E42, E44, G20