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Working Paper

Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium

We compare three market structures for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We also extend work on the microfoundations of money by allowing a general matching technology and entry. We study how equilibrium and the effects of policy depend on market structure. Under bargaining, trade and entry are both inefficient, and inflation implies first-order welfare losses. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation may actually improve welfare. Under posting, the Friedman rule yields the first best, and inflation implies second-order welfare losses.

Suggested Citation

Rocheteau, Guillaume, and Randall Wright. 2004. “Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium .” Federal Reserve Bank of Cleveland, Working Paper No. 04-05. https://doi.org/10.26509/frbc-wp-200405