The Informational Role of Prices and the Essentiality of Money in the LagosWright Model

A major concern in modern monetary theory has been the development of models where money is essential and yet substantive issues can be analyzed in a tractable manner. At the center of this e¤ort is Lagos and Wright (2005). The tractability in their framework is due to the fact that trade alternates between a centralized market and a decentralized market. A widespread view is that money is essential in the Lagos– Wright framework as long as agents can only observe prices in the centralized market. In this paper we show that this is not the case. Indeed, the presence of centralized trading allows agents to use prices to sustain cooperation. This suggests that an important friction for the essentiality of money is the lack of institutions that allow agents to coordinate behavior.