Search-Based Models of Money and Finance: An Integrated Approach

Randall Wright, Consultant

July 2016 | Journal of Economic Theory, 164: 10-31 | With Alberto Trejos
Many applications in monetary economics of search-and-bargaining theory use Shi–Trejos–Wright, hereafter STW; many applications in finance use Duffie–Gârleanu–Pedersen, hereafter DGP. These models share several features, and both concern liquidity, yet they also differ: in STW agents use assets as payment instruments when trading goods; in DGP they pay with goods (or transferable utility) when trading assets. We integrate the two. This clarifies connections between the literatures, and generates novel insights. Several new results are provided for the baseline STW and DGP models, while the integrated structure generates even more interesting outcomes, including endogenous transactions patterns and belief-based dynamics.