Money, Payments, and Liquidity

Description

In Money, Payments, and Liquidity, Guillaume Rocheteau and Ed Nosal provide a comprehensive investigation into the economics of money, liquidity, and payments by explicitly modeling the mechanics of trade and its various frictions (including search, private information, and limited commitment). Adopting the last generation of the New Monetarist framework developed by Ricardo Lagos and Randall Wright, among others, Nosal and Rocheteau provide a dynamic general equilibrium framework to examine the frictions in the economy that make money and liquid assets play a useful role in trade. They discuss such topics as cashless economies; the properties of an asset that make it suitable to be used as a medium of exchange; the optimal monetary policy and the cost of inflation; the coexistence of money and credit; and the relationships among liquidity, asset prices, monetary policy; and the different measures of liquidity in over-the-counter markets. The second edition has been revised to reflect recent progress in the New Monetarist approach to payments and liquidity. Rocheteau and Nosal have added three new chapters: on unemployment and payments, on asset price dynamics and bubbles, and on crashes and recoveries in over-the-counter markets. The chapter on the role of money has been entirely rewritten, adopting a mechanism design approach. Other chapters have been revised and updated, with new material on credit economies under limited commitment, open-market operations and liquidity traps, and the limited pledgeability of assets under informational frictions. Contents Acknowledgments Preface to the Second Edition General Introduction 1 The Basic Environment 1.1 Benchmark Model 1.2 Variants of the Benchmark Model 1.3 Further Readings 2 Pure Credit Economies 2.1 Credit with Commitment 2.2 Credit Default 2.3 Credit with Public Record-Keeping 2.4 Credit Equilibria with Endogenous Debt Limits 2.5 Dynamic Credit Equilibria 2.6 Strategic Default in Equilibrium 2.7 Credit with Reputation 2.8 Further Readings 3 Pure Currency Economies 3.1 A Model of Divisible Money 3.1.1 Steady-State Equilibria 3.1.2 Nonstationary Equilibria 3.1.3 Sunspot Equilibria 3.2 Alternative Bargaining Solutions 3.2.1 Bargaining Set 3.2.2 The Nash Solution 3.2.3 The Proportional Solution 3.3 Walrasian Price Taking 3.4 Competitive Price Posting 3.5 Further Readings 4 The Role of Money 4.1 A Mechanism Design Approach to Monetary Exchange 4.2 Efficient Allocations with Indivisible Money 4.3 Two-Sided Match Heterogeneity 4.3.1 The Barter Economy 4.3.2 The Monetary Economy 4.4 Further Readings 5 Properties of Money 5.1 Divisibility of Money 5.1.1 Currency Shortage 5.1.2 Indivisible Money and Lotteries 5.1.3 Divisible Money 5.2 Portability of Money 5.3 Recognizability of Money 5.4 Further Readings 6 The Optimum Quantity of Money 6.1 Optimality of the Friedman Rule 6.2 Interest on Currency 6.3 Friedman Rule and the First Best 6.4 Feasibility of the Friedman Rule 6.5 Trading Frictions and the Friedman Rule 6.6 Distributional Effects of Monetary Policy 6.7 The Welfare Cost of Inflation 6.8 Further Readings 7 Information, Monetary Policy, and the Inflation-output Trade-off 7.1 Stochastic Money Growth 7.2 Bargaining Under Asymmetric Information 7.3 Equilibrium Under Asymmetric Information 7.4 The Inflation and Output Trade-Off 7.5 An Alternative Information Structure 7.6 Further Readings 8 Money and Credit 8.1 Dichotomy Between Money and Credit 8.2 Money and Credit Under Limited Commitment 8.3 Costly Record-Keeping 8.4 Strategic Complementarities and Payments 8.5 Credit and Reallocation of Liquidity 8.6 Short-Term and Long-Term Partnerships 8.7 Further Readings 9 Firm Entry, Unemployment, and Payments 9.1 A Model with Firms 9.2 Firm Entry and Liquidity 9.3 Frictional Labor Market 9.4 Unemployment, Money, and Credit 9.5 Unemployment and Credit under Limited Commitment 9.6 Further Readings 10 Money, Negotiable Debt, and Settlement 10.1 The Environment 10.2 Frictionless Settlement 10.3 Settlement and Liquidity 10.4 Settlement and Default Risk 10.5 Settlement and Monetary Policy 10.6 Further Readings 11 Money and Capital 11.1 Linear Storage Technology 11.2 Concave Storage Technology 11.2.1 Nonmonetary Equilibria 11.2.2 Monetary Equilibria 11.3 Capital and Inflation 11.4 A Mechanism Design Approach 11.5 Further Readings 12 Exchange Rates, Nominal Bonds, and Open Market Operations 12.1 Dual Currency Payment Systems 12.1.1 Indeterminacy of the Exchange Rate 12.1.2 Cash-in-Advance with a Twist in a Two-Country Model 12.2 Money and Nominal Bonds 12.2.1 The Rate-of-Return Dominance Puzzle 12.2.2 Money and Illiquid Bonds 12.3 Recognizability and Rate-of-Return Dominance 12.4 Pairwise Trade and Rate-of-Return Dominance 12.5 Segmented Markets, Open Market Operations, and Liquidity Traps 12.6 Further Readings 13 Liquidity, Monetary Policy, and Asset Prices 13.1 A Monetary Approach to Asset Prices 13.2 Monetary Policy and Asset Prices 13.3 Risk and Liquidity 13.4 The Liquidity Structure of Assets’ Yields 13.5 Costly Acceptability 13.6 Pledgeability and the Threat of Fraud 13.7 Further Readings 14 Asset Price Dynamics 14.1 Asset Prices with Perfect Credit 14.2 Asset Prices when Liquidity is Essential 14.3 Dynamic Equilibria 14.4 Stochastic Equilibria 14.5 Public Liquidity Provision 14.6 Further Readings 15 Trading Frictions in Over-the-counter Markets 15.1 The Environment 15.2 Equilibrium 15.3 Trading Frictions and Asset Prices 15.4 Intermediation Fees and Bid-Ask Spreads 15.5 Trading Delays 15.6 Further Readings 16 Crashes and Recoveries in Over-the-counter Markets 16.1 The Environment 16.2 Dealers, Investors, and Bargaining 16.3 Equilibrium 16.4 Efficiency 16.5 Crash and Recovery 16.6 Further Readings Bibliography Index