On Market Activity and the Value of Money

26 Pages Posted: 23 Dec 2014

See all articles by Gabriele Camera

Gabriele Camera

Chapman University - Economic Science Institute; University of Bologna - Dept. of Economics

Filip Vesely

University of Wisconsin at Milwaukee - Economics

Date Written: December 22, 2014

Abstract

In a random-matching monetary economy, efficient and inefficient sellers choose between home or market production. Since inefficient sellers bargain up their prices, two equilibria may exist – with high or low market participation – depending on extent of heterogeneity and frictions. In equilibrium, the presence of inefficient sellers on the market has two opposing effects. It raises trading frequencies, so it lowers consumption risk, but it lowers the value of money, raising prices. This may reduce trading efficiency. Equilibria with full and limited participation can coexist; when average efficiency is high and agents are patient, limited participation is socially preferable.

Keywords: Heterogeneity, Money, Search, Price Externalities, Endogenous Market Participation

JEL Classification: D60, E40

Suggested Citation

Camera, Gabriele and Vesely, Filip, On Market Activity and the Value of Money (December 22, 2014). Available at SSRN: https://ssrn.com/abstract=2541989 or http://dx.doi.org/10.2139/ssrn.2541989

Gabriele Camera (Contact Author)

Chapman University - Economic Science Institute ( email )

Orange, CA 92866
United States

HOME PAGE: http://www1.chapman.edu/~camera/

University of Bologna - Dept. of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Filip Vesely

University of Wisconsin at Milwaukee - Economics ( email )

3210 N. Maryland Avenue, Bolton Hall 802
Bolton Hall 802
Milwaukee, WI 53211
United States

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