Money, Intermediaries, and Cash-in Advance Constraints
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Applied Micro Theory Workshop (2006-2010)395 McNeil
Philadelphia, PA
I study a search economy in which intermediaries are the driving force coordinating the economy on the use of a unique, common medium of exchange for transactions. If search frictions delay trade, intermediaries offering immediate exchange opportunities can make arbitrage gains from a price spread, but they have to solve the search market's allocation problem. Intermediaries solve this problem best by imposing a common medium of exchange to other agents, and a Cash-in-Advance constraint arises in equilibrium: Agents trade twice in order to consume, once to exchange their production against the medium of exchange, and once to purchase their consumption. By studying the evolutionary stability of equilibria, I discuss which equilibria are likely to arise as long run outcomes. I extend my analysis to the study of fiat currencies and free banking systems.
For more information, contact Philipp Kircher.