Bargaining and the Value of Money

By Guillaume Rocheteau, C. Waller. 2007

179 citations recorded by the source corpus.

Search models of monetary exchange have typically relied on Nash (1950) bargaining or strategic games that yield an equivalent outcome to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions, whereas under strongly monotonic solutions such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman Rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/31338d6e7a60893132d210128ddc70855a27fb6a

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Citations in the corpus

Sticky Prices versus Monetary Frictions: An Estimation of Policy Trade-Offs (2009, unknown): “The model specification is closely tied to the theoretical literature that is developing micro-founded models of monetary exchange, in particular Lagos and Wright (2005), and Aruoba, Waller, and Wright (2008).”
Liquidity and asset-market dynamics (2010, methodology): “st u(y) +Wt(a a; s s; d) Wt(a; s; 0) = 1 [f(1 y) + (qt + ) a +Rt s + d f(1)] (6)”
Housing and Liquidity (2015, methodology): “Alternatively, one can use the proportional bargaining solution in Kalai (1977), ( ) = argmax st = [()− ()] and ≤ which has some advantages in this class of models (see Aruoba, Rocheteau, and Waller (2007)).”
Inflation and Unemployment in the Long Run (2011, unknown): “However, during the 1990s, M/pY is systematically lower for all nominal interest rates — the money demand curve shifts down — and for this period the baseline parameters do not match the data well.”
Can currency competition work? (2016, background): “At the risk of being highly selective, we build on the tradition of Cavalcanti, Erosa, and Temzelides (1999, 2005), Cavalcanti and Wallace (1999), Williamson (1999), Berentsen (2006), and Monnet (2006).(6) As we mentioned above, our emphasis is different from that in these previous papers, as we dep”
Open market operations (2018, background): “A stationary monetary equilibrium is a list (  2  ) solving (3)-(7) with   0 and  = .”
Liquidity: A New Monetarist Perspective (2017, methodology): “Aruoba et al. (2007) advocate the use of Kalai in this model, while recognizing that it has some issues (e.”