DP8200 Equilibrium selection in a fundamental model of money

Author(s): Luis Araujo, Bernardo Guimar√£es
Publication Date: January 2011
Keyword(s): equilibrium selection, Money, risk-dominance, search
JEL(s): D83, E40
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8200

Fundamental models of money always exhibit autarkic equilibria where money has no value. In this paper we propose a simple procedure to select among equilibria in such models. Our procedure unveils a natural mapping between equilibrium behavior and the primitives of the economy, thus offering insights on the conditions under which money emerges as a medium of exchange. Overall, our results favour money over autarky, especially if agents are patient.