Monetary Mechanisms
Chao Gu
Department of Economics, University of Missouri
Randall Wright
Departments of Economics and Finance, UW-Madison,
FRB Chicago, FRB Minneapolis, and NBER
September 4, 2015
Abstract
We provide a series of results for economies where exchange is facilitated by liquid assets. Compared to past work, minimal structure is imposed on the mechanism determining the terms of trade. Four simple axioms lead to a class of mechanisms encompassing standard bargaining theories, competitive price taking and other solution concepts. Using only properties implied by the axioms,we prove existence and uniqueness of nondegenerate steady state. We also show how to support desirable outcomes using creatively designed mechanisms. Special cases include pure currency economies, but we also consider extensions to incorporate real assets and credit.
JEL Classification Nos: E42, E51
Keywords: Money, Mechanisms, Liquidity, Credit
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