Summary.
We construct a tractable ‘fundamental’ model of money with equilibrium heterogeneity in money balances and prices. We do so by considering randomized monetary trades in a standard search-theoretic model of money where agents can hold multiple units of indivisible ‘tokens’ and can offer lotteries on monetary transfers. By studying a simple trading pattern, we can analytically characterize the monetary distribution. Interestingly, such distributions match those observed in numerically simulated economies with fully divisible money and price heterogeneity.
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Received: 16 April 2003, Revised: 11 February 2004
JEL Classification Numbers:
D30, D83, E40.
A. Berentsen, G. Camera, C. Waller: The paper has benefitted from insightful comments of two anonymous referees, whom we thank. We also thank participants at the conference “Recent Developments in Money and Finance,” held at Purdue University in May 2003, and the EPRI/University of Western Ontario Money Conference held in October 2003.
Correrspondence to: G. Camera
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Berentsen, A., Camera, G. & Waller, C. The distribution of money and prices in an equilibrium with lotteries. Economic Theory 24, 887–906 (2004). https://doi.org/10.1007/s00199-004-0485-5
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DOI: https://doi.org/10.1007/s00199-004-0485-5