Money Creation in a Random Matching Model

Abstract

I study money creation in versions of the Trejos-Wright (1995) and Shi (1995) models with indivisible money and bounded individual holdings. I work with the same class of policies as in Deviatov and Wallace (2001), who study money creation in that model. However, I consider two alternative notions of implementability - the ex ante pairwise core and the ex post pairwise core. I compute a set of numerical examples to determine whether money creation is beneficial in my model. I find that if the ex post pairwise core is the notion of implementability, then examples where money creation is beneficial are easily found, while I find no such examples if the notion of implementability is the ex ante pairwise core.

Keywords: inflation, Friedman rule, optimal monetary policy

JEL Classification: E31