Search-based models of money and finance: An integrated approach

Many applications of search theory in monetary economics use the Shi-TrejosWright model, hereafter STW, while applications in finance use Duffie-GârleanuPederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between the literatures, and generates new insights and applications. Even in the special cases of the baseline STW and DGP models, we provide propositions generalizing and strengthening what is currently known, and rederiving some existing results using more tractable arguments. ∗We thank many friends and colleagues for their input, including Cyril Monnet, Chao Gu, Guillaume Rocheteau, Yu Zhu, Ricardo Lagos, and especially Huberto Ennis, Lasse Pederson, and Ana Babus, who served as formal discussants. We also thank workshop organizers and participants at FRB Chicago, Arhus, Wisconsin, Newcastle, INCAE and Carnegie. Wright thanks the NSF and the Ray Zemon Chair in Liquid Assets at the Wisconsin School of Business for research support. The usual disclaimers apply.