Money as a Mechanism in a Bewley Economy∗

We study what features an economic environment might possess, such that it would be Pareto efficient for the exchange of goods in that environment to be conducted on spot markets where those goods trade for money. We prove a conjecture that is essentially due to Bewley [1980, 1983]. The gist is that monetary spot trading is nearly efficient ex ante in an environment where very patient agents can accumulate large enough money stocks to be completely self insured. We also study examples where a nonmonetary mechanism is preferred ex ante to any monetary mechanism (at least, when the comparison is restricted to stationary equilibria) and where an inflationary monetary mechanism is preferred ex ante to a laissez-faire or deflationary monetary mechanism in an environment with impatient agents. J.E.L. Classification: E31, E42