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FEDERAL RESERVE BANK OF CLEVELAND

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NUMBER 18

By Ed Nosal, Guillaume Rocheteau, and Randall Wright

POLICY DISCUSSION PAPER

The 2006 Summer Workshop on
Money, Banking and Payments:
An Overview

MARCH 2007

POLICY DISCUSSION PAPERS

FEDERAL RESERVE BANK OF CLEVELAND

The 2006 Summer Workshop on
Money, Banking and Payments:
An Overview
By Ed Nosal, Guillaume Rocheteau, and Randall Wright
This Policy Discussion Paper summarizes the papers presented at the 2006 Summer
Workshop on Money, Banking, and Payments. Every summer since 2002, some of the
best researchers in the areas of theory, policy, and quantitative analysis relating to money,
banking and payments systems have met in Cleveland to discuss their latest work. The
papers presented at the 2006 workshop cover a vast spectrum of issues and use a wide
variety of methods. Still, there is an underlying theme, which is an effort to enhance our
understanding of monetary economics, broadly defined, and to uncover new ways to think
about important substantive issues. Hopefully, this helps not only theoretical monetary
economists, but also economists such as central bankers with a more practical policyoriented view.

Ed Nosal is a senior
economic advisor at
the Federal Reserve
Bank of Cleveland;
Guillaume Rocheteau is
an economic advisor at
the Bank; and Randall
Wright is the James Kim
Professor of Economics
at the University of
Pennsylvania.

Materials may be
reprinted, provided that
the source is credited.
Please send copies of
reprinted materials to the
editor.

POLICY DISCUSSION PAPERS

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Policy Discussion Papers are available on the Cleveland Fed’s site on the World Wide Web:
www.clevelandfed.org/Research.
Views stated in Policy Discussion Papers are those of the authors and not necessarily
those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal
Reserve System.

ISSN 1528-4344

FEDERAL RESERVE BANK OF CLEVELAND

Introduction
The papers presented at the 2006 Summer Workshop on Money, Banking, and Payments
cover a vast spectrum of issues and use a wide variety of methods. Still, there is an underlying theme, which is an effort to enhance our understanding of monetary economics,
broadly defined, and to uncover new ways to think about important substantive issues.

Basic Research
In search models, the distribution of wealth may be nondegenerate, which makes analytic solutions difficult at best. As a result, efforts have been made to construct environments where the distribution is degenerate. One such environment is the large-household model, where each household consists of a non-atomic measure of agents. In the
literature which uses this framework, perhaps surprisingly, there does not exist a perfectly clear notion or at least a definition of equilibrium. In “Equilibrium Concepts in the
Large-Household Model,”Tao Zhu formulates two concepts of equilibrium in the context
of a monetary environment. In what he calls the no-commitment approach, individual
household agents search for partners and make their own utility maximizing choices in
separate meetings. In what he calls the commitment approach, the household chooses a
contingent plan for individuals, who must abide by this plan.To obtain a degenerate distribution of money under the no-commitment approach, a large household with nonlinear preferences is converted into one with quasilinear preferences. In the commitment
approach, commitment itself yields a degenerate distribution. However, allocations in the
commitment approach are not subgame perfect, which results in a weaker equilibrium
concept.
In “Anonymous Markets and Monetary Trading,” C. D. Aliprantis, Gabriele Camera, and
Daniela Puzzello point out that random anonymous matching is not in itself sufficient to
make money essential in models with alternating decentralized and centralized markets
(which many people are studying these days). They show eliminating money need not
re- duce efficiency if the actions of trading partners are observable and if are sufficiently
patient.The idea is that centralized trading allows rapid exchange of privately observed
information, so a credible informal enforcement scheme exists, which sustains the efficient allocation without money. However, this “social norm” is not robust to adding a
small amount of noise in observations. They go on to examine variations on the basic
environment where money is essential. In particular, infinitely-lived agents repeatedly
move in and out of markets populated by numerous anonymous agents, who are always
complete strangers because their trading paths intersect at most once. In this environment money is essential. The authors’ techniques can be used to expand the modeling
of environments in which money has a necessary role.
Models such as Kiyotaki and Wright (1989) have both barter and monetary equilibria.
These models, however, cannot explain the transition from a barter equilibrium to a
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monetary equilibrium. In “The Rise of Money:An Evolutionary Analysis of the Origins of
Money,” Kevin Hasker and Tahmilci develop a model that addresses the issue.A standard
theory of stochastic evolution is modified so that agents are able to calculate out-of-equilibrium continuation values.This is a subtle but important point because, in the context
of monetary economics, accepting money today—which is an out-of-equilibrium action in a barter equilibrium—requires the agent to calculate the future value associated
with this action. In the standard stochastic evolution model, agents are assumed to behave myopically (choosing the action that maximizes current period payoffs). Hasker
and Tahmilci demonstrate that under reasonable conditions, nonconvertible fiat money
emerges naturally in complex economies.
Despite the recently successful efforts at characterizing optima in models where
money is essential, virtually all research on business cycles with money ignore optimality. This gap is in part explained by the prominence of real-business-cycle models for
which the standard welfare theorem applies; that is, decentralized equilibria correspond
to Pareto-optimal allocations. Since there are no welfare theorems for monetary economies, concerns about the optimality of responses to real shocks in a monetary context
should be raised. In “Optimal Propagation of Real Shocks in a Cash-in-Advance Model”
Ricardo Cavalcanti shows that the optimal allocations in monetary models can be history-dependent; that is, output is not only a function of the current realization of the real
shock, but it depends on the entire history of the economy.Thus, monetary models may
display business-cycles properties that are different in nature from their standard real
counterparts, with different implications for amplification and propagation of shocks.
In “Learning by Matching,” Manuel Amador and Pierre-Olivier Weill study the interaction between public and private learning channels in a large population. At the beginning of time, private information about the state of the economy is disseminated among
a large number of agents.Then, in every period, each agent observes a public and private
noisy signal centered around the average action taken by the population. The public
signal represents an endogenous aggregate variable such as a prices or quantities. The
private signal represents the information gathered through private communication and
local interactions. Armador and Weill identify conditions such that the average learning
curve is S-shaped; that is, learning starts slow, intensifies rapidly, and finally converges
to the truth, as found by a number of empirical studies. Perhaps surprisingly, they show
that increasing public information at the beginning slows down learning in the long run
and, under some conditions, reduces welfare.

Fiscal Policy
In “Dynamic Taxation, Private Information, and Money,” Christopher Waller studies optimal fiscal and monetary policy in a model where the frictions giving rise to money are
modeled explicitly. Most of the literature on the inflation tax adopts a Ramsey approach.
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government is assumed to be unable to use lump sum taxes and chooses distortionary
taxes to maximize welfare of the representative agent. There are two drawbacks to this
approach. First, lump-sum taxes achieve the first-best allocation, and the approach simply prohibits their use for unmodeled reasons. Second, money is “forced” into the model
via some shortcut (money-in-the-utility function, cash-in-advance, etc.). Waller combines
modern monetary theory with the .new dynamic public finance. using an overlapping
generations model with agents born every other period.The young and old trade in perfectly competitive centralized markets. In middle age, agents receive preference shocks
and trade among themselves in an anonymous search market where money is essential.
The efficient allocation trades off risk sharing against production efficiency. For a government to replicate this outcome in a monetary economy, without record-keeping, distortionary taxation of money is needed: lump sum taxation is feasible, but not optimal.
Following the Ramsey tradition, Boragan Aruoba, and Sanjay Chugh study “Optimal
Monetary and Fiscal Policy when Money Is Essential.”Three important findings emerge:
The Friedman rule (zero nominal interest rates) is typically not optimal; inflation should
be stable over time; and optimal policy includes a subsidy to capital.The deviation from
the Friedman rule emerges because of the Ramsey planner’s desire to create a wedge between the decentralized market—where money is essential—and the centralized market—where it is not. They argue that inflation is not a substitute for a missing tax, as is
sometimes assumed in standard models, but is precisely the right tax to use in this case.
Inflation should be stable over time, in contrast to standard Ramsey models. Finally, since
production in the decentralized market is lower than the optimal level, there is underaccumulation of capital, which can be ameliorated by a subsidy to capital income. These
three findings contrast sharply with traditional Ramsey models.

Banking and Payments
In “Payment Networks in Search Model of Money,” Antoine Martin, Michael Orlando, and
David Skeie study a model that gives rise to a payment network. Specifically, they assume
agents can pay a one-time cost to access a central database that keeps track of payments.
This approach will prove fruitful to study payments in a general equilibrium setting.Two
incentive constraints are key in this context: Agents must have an incentive to pay the
cost to access the database, and agents with access to the data must have an incentive to
produce. Conditions are determined under which these constraints are simultaneously
relaxed.The analysis supports the “no surcharge rule” of credit card companies (the price
of a good should be the same regardless of whether it is purchased with cash or credit card). Multiple equilibria can arise because of network effects, and policies are studied that ameliorate this. These policies include increasing the money supply and taxing
agents who do not pay the access cost to the database, the latter being more efficient.

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In “Banking, Inside Money, and Outside Money,” Hongfei Sun studies a model with
spatial separation, private information, and aggregate uncertainty. A bank provides two
services: It intermediates by managing monetary payments, and it conducts stochastic
monitoring. The optimality and operating characteristics of various payment arrangements are examined, including inside money, outside money, and the coexistence of
both. Banking with only inside money strictly dominates. Outside money allows agents
to participate in future markets, which provides a disincentive for them to pay off current obligations. Inside money that expires immediately after settlement, however, has
no value in the future and, hence, avoids this result. Previous papers identify greater
flexibility and the ability to respond to unanticipated shocks as benefits associated with
private money; the current paper identifies another and quite novel advantage of private
money.
The Friedman rule is optimal in a wide class of models and is a straightforward policy
to implement, requiring only that the nominal interest rate be zero. Thus, models that
imply the optimality of the Friedman rule also imply that monetary policy is simple.
However, in practice, monetary policy appears to be difficult. In “Banks, Open Market
Operations, and the Friedman Rule,” Stephen Williamson studies four models of money.
In the first three, some version of the Friedman rule is optimal, even in cases where it
has been claimed in the literature that it is not.Therefore, the Friedman rule is even more
robust than previously thought. However, in a model of money and credit with market segmentation, the Friedman rule is not optimal, and determining optimal monetary
policy is a nontrivial task, consistent with reality.This ongoing work very much helps to
integrate theory and policy.
A well-known model by Green and Lin assumes a version of the Diamond-Dybvig
banking model with a finite number of agents, independent determination of each
agent’s type, and sequential service. For special preferences, Green and Lin show that
the ex ante first-best allocation is the unique equilibrium outcome even with private
information about types. In “The Role of Independence in the Green-Lin Diamond-Dybvig Model,” David Andolfatto, Ed Nosal, and Neil Wallace show, via a simple argument,
that uniqueness of the truth-telling equilibrium holds for general preferences—and, in
particular, for a constrained-efficient allocation whether first-best or not. The crucial assumption that is needed is independence. This very much advances and helps our understanding of modern banking theory.
In “Competition in the Supply of Fiat Money,” Luis Araujo and Braz Camargo model an
economy where both the demand and supply of money are endogenously determined,
and money is essential. This paper provides a formal assessment for a commonly held
view that money should not be relegated to the market. For example, Friedman (1959)
argued that “monetary arrangements have seldom been left entirely to the market, even
in societies following a thoroughly liberal policy in other respects, and that there are
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good reasons why this should have been the case.” Two distinct market structures are
considered. In one, there is natural monopoly in that only one agent produces money,
and in the other, money can be produced by more than one agent.The authors focus on
the dynamic incentives of the money supplier in providing a stable currency in order to
build a good reputation, and how outcomes are affected by competition.
Standard theory implies the correlation between velocity and nominal interest rates
is negative. However, in the 1984 to 2004 U.S. data, this correlation is positive. In “U.S.
Money Demand: Theory and Evidence,” Marcus Hagedorn develops a theory of money
demand that reconciles these observations. After a careful look at the data, he builds a
model where Diamond-Dybvig banks are integrated into a dynamic equilibrium framework. Households receive liquidity shocks that determine their rate of time preference,
and firms receive productivity shocks. Households need money for transactions, but
firms can use either bonds or money for investment. A bank is an intermediary that
provides households with money or investments, and purchases bonds from firms. In
the model, the monetary transmission mechanism works through banks and, specifically,
through the way they manage the provision of liquidity.The model is consistent with the
above-mentioned facts.

Money and Other Assets
Money and nominal bonds coexist, with bonds dominating money in the rate of return.
In recent history, government bonds bear little default risk and they have most of the intrinsic features of money, but they do not act as medium of exchange to the same extent.
The literature explains coexistence by assuming legal restrictions that reduce individuals’ utility. Finding an efficiency role for legal restrictions, and hence for illiquid bonds,
seems important. In “Welfare Improvement from Restricting the Liquidity of Nominal
Bonds,” Shoyoung Shi constructs a model in which a medium of exchange helps decentralized markets for goods, where individuals face shocks to tastes and production. Because capital markets are imperfect, they cannot insure against these shocks easily.A legal
restriction prohibits nominal bonds from being used as a means of payment in a subset
of trades. Shi shows this legal restriction can improve the society’s welfare by effectively
providing partial insurance against the shocks.
In “Counterfeit Money,” Elena Quercioli and Lones Smith develop a tractable theory
of counterfeiting. They assume counterfeiters compete against both law enforcement
and the public, who must verify currency. There is variable verification effort. Hence,
individuals play a “hot potato” game, where everyone seeks to avoid acquiring counterfeit currency. With higher denominations, counterfeiters producer better quality, and
verifiers respond with greater effort. The theory yields some key time series and crosssectional patterns of counterfeiting: (a) the ratio of seized to passed money rises in
the denomination; (b) the vast majority of counterfeit money used to be seized before
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circulation, while now the reverse holds; (c) the most counterfeited denominations are
$10, $20, and $100, while $5 and $50 are least; and (d) the share of passed money found
by Federal Reserve Banks generally falls with the value of the note, while their passed
money rate is a U-shaped function of the economywide passed money rate.
In “Financial Market Frictions and Price Stability,” Gabriele Camera and Francesco Ruscitti study the impact of inflation on real and financial activity in the Lagos-Wright model.
Financial intermediaries are banks that collect deposits and make loans to provide working capital.The asset-transformation process, however, is subject to frictions that generate a random non-interest cost to banks. In the model, inflation amplifies the severity of
financial market frictions, which affects productive activities.This paper complements a
literature that studies mechanisms to which excessive inflation is especially disruptive.
As inflation grows, the cost of liabilities rises, and banks reduce costs by undertaking
fewer and cheaper projects. Also, there exists an inflation threshold beyond which the
loan supply is so limited that firms cannot get enough funds to hire workers. This constrains employment, production, and consumption.This model constitutes an important
step in understanding the role of monetary policy in financial intermediation.
Schumpeter long ago established a link between finance and innovation. Leo Ferraris
and Makoto Watanabe, in “Money, Credit, and Collateral,” examine an aspect of this link
that has received scant attention: the relationship between innovation and means of payment. On one hand, innovators would like to sell innovations and reap rewards immediately; on the other, they want to have enough time to sell innovations without facing the
competition from the first buyers, who may copy them. In a world with limited enforcement and limited property rights, the choice of the payment instrument will affect the
extent to which innovations spread through the economy.The use of credit is beneficial
for the innovator since it allows him to be a monopolist seller for some time into the
future (until he delivers the blueprint), but the cost is that he receives a portion of this
payoff in the future.This style of research, exploring the links between finance and innovation, is potentially very important for understanding growth and development. All of
the work reviewed in this section help us to understand the interplay between finance
and the macroeconomy.

Labor Markets
The relationship between inflation and unemployment is one of the most important issues in macroeconomic theory and policy. Much progress has been made on these issues recently by incorporating frictions using search theory, but existing models analyze
either unemployment or inflation separately. Aleksander Berentsen, Guido Menzio, and
Randall Wright develop a framework to analyze the two phenomena together in “Inflation and Unemployment.” Their paper makes contributions to two disparate literatures
and provides a unified model for theory, policy analysis, and quantitative work. The au6

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thors calibrate their model and discuss the extent to which it can account for the salient
aspects of the U.S. experience over the past 50 years with inflation, unemployment, interest rates, and velocity.They also discuss optimal fiscal and monetary policy.
In “Money in Production and Frictions in the Labor Market” Alok Kumar formalizes
the idea that money facilitates the organization of production processes. In the model,
a double-coincidence-of-wants problem arises due to the potential mismatch between
what workers consume and what firms produce. Money facilitates trading in both the
labor market and the goods market.The model allows a natural integration of imperfect
labor markets into monetary economies. The paper studies the effects of inflation on
output, employment, real wages, and welfare under three wage-setting mechanisms: individual bargaining, union bargaining, and an efficiency-wage mechanism. It is shown that
an increase in inflation reduces output and employment under all three mechanisms
and raises real wages under individual and union bargaining. Both this and the paper
by Berentsen, Menzio, and Wright contribute to the integration of macrolabor and monetary economics.

Liquidity and Inflation
In “Liquidity,” Ben Lester, Andrew Postlewaite, and Randall Wright develop a model with
real assets and money, where these assets may have differential liquidity (i.e., a differential probability of being accepted in exchange).They study which agents and transactions
are affected by monetary policy, and the effects on prices and allocations.They show that
even agents and transactions that never use cash are affected by inflation or interest rates.
They also endogenize liquidity in the model by introducing recognizability: For example,
money may be perfectly recognizable, but not everyone is informed enough to distinguish real from counterfeit claims to other assets. Given the costs of becoming informed,
the model determines who accepts what in equilibrium.A version with money and T-bills
is used to analyze open-market operations.
In “Liquidity and Spending Dynamics,”Veronica Guerrieri and Guido Lorenzoni study
how financial frictions affect the response of an economy to aggregate shocks, focusing
on liquidity constraints.They use the Lagos-Wright model, augmented with productivity
shocks.They show that the response to aggregate shocks depends on the rate of return
on liquid assets. When liquid assets pay a low return, agents hold smaller reserves, and
the response tends to be larger. In this case, agents expect to be liquidity constrained and,
due to a precautionary motive, their consumption decisions respond more to changes in
expected income. On top of this, there is a general equilibrium effect that magnifies the
economy’s response.This model is extremely interesting because it shows that inflation
(monetary policy) can, in principle, have a big impact on the response of the economy
to real shocks.

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In “Heterogeneity and the Suboptimality of the Friedman Rule,” Paola Boel and Gabriele Camera attempt to harmonize various strands in the literature on the cost of
inflation by retaining the explicit microfoundations found in the Lagos-Wright model,
but enriching it by introducing some heterogeneity to generate a tractable distribution
of wealth. The model is calibrated and used to quantify the welfare cost of inflation. At
the aggregate level, estimates for the cost are not far from estimates in Lagos-Wright.
However, heterogeneity affects the conclusions a lot. When distributional effects are
examined, inflation can be welfare-increasing for a segment of the population. This is
another example of how models with explicit microfoundations can greatly enhance
our understanding of policy issues.
In “Search, Market Power, and Inflation Dynamics” by Allen Head and Beverly Lapham,
buyers in each of two countries observe a random sample of prices posted by both
domestic and foreign sellers. Shocks to money or productivity change the returns to
search in both countries. Movements in search intensity result in changes in the average
markup, and this has a number of implications for both price-level movements and fluctuations in both output and consumption across countries. Money is non-neutral in the
short run as shocks to the money growth rate have different effects on agents’ returns
to search in the two countries.As even transitory shocks result in persistent movements
of the distribution of wealth across countries, the responses of search intensity and thus
the movements in the real exchange rate that they generate are persistent as well. The
model can account for several facts difficult to capture with previous models.
In “The Welfare Costs of Expected and Unexpected Inflation,” Miguel Faig and Zhe Li
introduce imperfect information about nominal shocks à la Lucas into the Lagos-Wright
framework. Now the welfare cost of erratic monetary policy depends not only on the
variability it generates in real GDP, but also on the concentration of these effects on
particular segments of the economy and on the tolerance of individuals to fluctuations
in that segment. The empirical analysis indicates that the welfare gain of eliminating
the U.S. monetary business cycle observed from 1892 to 2005 is only 0.0026 percent
of GDP while the welfare gain of reducing the observed average rate of inflation to the
Friedman rule is 0.2 per cent of GDP. This calls for a reconsideration of what issues are
most policy relevant in monetary economics. All of the papers reviewed in this section
suggest reconsideration of some fundamental policy issues.

Market Structure
Financial markets, such as the NYSE or the NASDAQ, are highly liquid, warranted by various market-makers, dealers and other specialists that facilitate trades. While their role as
providers of immediacy may be inconspicuous in normal times, it becomes critical in
times of large imbalances. In “Crashes and Recoveries in Illiquid Markets,” Ricardo Lagos,
Guillaume Rocheteau, and Pierre-Olivier Weill take seriously the line that asset markets
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are not frictionless and that intermediaries are there to remedy these frictions. They assume that there are trading delays that limit investors’ access to the market, while dealers
have instantaneous access.The authors derive conditions on fundamentals under which
dealers accumulate asset inventories when the aggregate demand for the asset falls.They
show dealers’ intervention is useful when a crisis is severe, short-lived, and unanticipated.
They show dealers are less likely to intervene in times of crisis if they have high market
power. And they show dealers are less likely to provide liquidity during a market crash
when trading delays are short.
In “A Model of Money with Multilateral Matching,” Manolis Galenianos and Philipp
Kircher study a model of monetary exchange where goods are allocated according to
auctions.Their novel result is that homogeneous buyers hold different amounts of money, leading to equilibrium price dispersion. Two important frictions are that the buyer
can visit only one seller at a time and sellers have some capacity constraint.The intuition
behind the main result that identical buyers choose to bring different amounts of money
to the decentralized market is straightforward: If all buyers held the same amount of
money, then a deviant bringing infinitesimally more would always win the good and
hence enjoy a discretely higher probability of consuming for negligible additional cost.
To examine how output is affected by inflation, an entry decision by sellers is introduced.The result is that entry is suboptimal except at the Friedman rule.
People produce goods so that they can be sold to others; when people sell goods they
can then purchase the goods they desire. If there is little or no money in the economy,
agents have to rely on barter, which can be especially tough for producers of specialized
goods. If, however, there is a significant amount of liquidity in the economy, the problems
faced by specialists are reduced. In “Money and the Variety of Goods,” Ken Burdett and
Andrei Shevchenko investigate the number of goods that will be produced. The model
emphasizes the interpretation of goods as bundles of characteristics. Agents can produce specialist or generic goods. Preferences are heterogeneous, and each agent has a
favorite variety:A generic good does not yield as much utility as your favorite. Barter and
monetary allocations are compared, and the authors find that money encourages the
production of specialist varieties. Although this is an old idea, is it useful to formalize it,
and this model does deliver several new insights.
Lagos and Wright propose a framework for monetary policy analysis that is analytically tractable.The tractability, however, comes at a cost. By allowing agents to rebalance
their portfolios for free every period, the centralized market in the Lagos-Wright model
effectively provides an “insurance” that allows agents to undo all individual-specific trading shocks immediately.The special assumptions needed to generate tractability rule out
potentially interesting effects. In “Endogenously Segmented Markets in a Search-Theoretic Model of Monetary Exchange,” Jonathan Chiu and Miguel Molico add frictions that
imply agents choose to attend the centralized market only infrequently and hence an
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inventory of money for decentralized market trade. By endogenizing the decision to participate in the centralized market, the model endogenizes the responses of velocity, output, and other variables.The welfare cost of inflation is different from the baseline LagosWright model because inflation can now distort the consumption profile, affect market
participation, and redistribute money holdings.There are more channels through which
inflation can affect welfare in the new model. First, it induces agents to participate in
the centralized market more frequently, which is costly in terms of resources. Second,
even if the participation rate were unchanged, agents spend their money faster to avoid
the inflation tax, making consumption less smooth. Third, inflation redistributes money
holdings.This new class of models greatly enhances our understanding of the effects of
inflation.
In “Bidding for Money” Benoit Julien, John Kennes, and Ian King explore the robustness of the results from search-theoretic monetary models when the assumptions of
random matching and bilateral bargaining are replaced with different microfoundations.
In particular, they introduce directed search and multilateral matching into a model
which is otherwise standard, based on Shi and Trejos-Wright (1995), and they consider
two pricing mechanisms: ex ante price posting, and ex post bidding. Once search is
directed (guided by prices) the arrival rate that sellers face is no longer given, but a function of the price associated with a seller. Thus, directed search allows for the existence
of monetary equilibria with price posting—something that cannot be obtained with
random matching. Overall, they show that this variation of the Shi-Trejos-Wright model
preserves many of its original properties, and hence the conclusions of previous monetary models are actually quite robust.

Summary
The 2006 workshop provided an excellent opportunity to hear about work by, and to interact with, some of the best researchers in the areas of theory, policy, and quantitative
analysis relating to money, banking and payments systems. Hopefully the insights offered
in these papers helps not only theoretical monetary economists, but also economists
such as central bankers with a more practical policy-oriented view.

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Papers Presented at the
Summer Workshop on Money, Banking, and Payments
August 8–18, 2006

Basic Research
Equilibrium Concepts in the Large-Household Model
Tao Zhu (Cornell University)
Anonymous Markets and Monetary Trading
C. D. Aliprantis, Gabriele Camera, and Daniela Puzzello (Purdue University)
The Rise of Money: An Evolutionary Analysis of the Origins of Money
Kevin Hasker and Ahmet Tahmilci (Bilkent University)
Optimal Propagation of Real Shocks in a Cash-in-Advance Model
Ricardo Cavalcanti (Getulio Vargas Foundation)
Learning by Matching
Manuel Amador (Stanford University) and Pierre-Olivier Weill (New York University)
Fiscal Policy
Dynamic Taxation, Private Information, and Money
Christopher Waller (University of Notre Dame)
Optimal Monetary and Fiscal Policy when Money Is Essential
Boragan Aruoba (University of Maryland), and Sanjay Chugh (Board of Governors of the
Federal Reserve System)
Banking and Payments
Payment Networks in Search Model of Money
Antoine Martin (Federal Reserve Bank of New York), Michael Orlando (Federal Reserve Bank of
Kansas City), and David Skeie (Federal Reserve Bank of New York)
Banking, Inside Money, and Outside Money
Hongfei Sun (University of Toronto)
Banks, Open Market Operations, and the Friedman Rule
Stephen Williamson (University of Iowa)
The Role of Independence in the Green-Lin Diamond-Dybvig Model
David Andolfatto (Simon Fraser University), Ed Nosal (Federal Reserve Bank of Cleveland), and
Neil Wallace (University of Pennsylvania)
Competition in the Supply of Fiat Money
Luis Araujo (Michigan State University) and Braz Camargo (University of Western Ontario)
U.S. Money Demand: Theory and Evidence
Marcus Hagedorn (University of Frankfurt)

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Money and Other Assets
Welfare Improvement from Restricting the Liquidity of Nominal Bonds
Shoyoung Shi (University of Toronto)
Counterfeit Money
Elena Quercioli (Tulane University) and Lones Smith (University of Michigan)
Financial Market Frictions and Price Stability
Gabriele Camera and Francesco Ruscitti (Purdue University)
Money, Credit, and Collateral
Leo Ferraris (London School of Economics) and Makoto Watanabe (Universidad Carlos III de Madrid)
Labor Markets
Inflation and Unemployment
Aleksander Berentsen (University of Basel), Guido Menzio (Northwestern University), and
Randall Wright (University of Pennsylvania)
Money in Production and Frictions in the Labor Market
Alok Kumar (University of Victoria)
Liquidity and Inflation
Liquidity
Ben Lester, Andrew Postlewaite, and Randall Wright (University of Pennsylvania)
Liquidity and Spending Dynamics
Veronica Guerrieri (University of Chicago) and Guido Lorenzoni (Massachusetts Institute of Technology)
Heterogeneity and the Suboptimality of the Friedman Rule
Paola Boel (Bowdoin College) and Gabriele Camera (Purdue University)
Search, Market Power, and Inflation Dynamics
Allen Head and Beverly Lapham (Queen’s University)
The Welfare Costs of Expected and Unexpected Inflation
Miquel Faig and Zhe Li (University of Toronto)
Market Structure
Crashes and Recoveries in Illiquid Markets
Ricardo Lagos (New York University), Guillaume Rocheteau (Federal Reserve Bank of Cleveland), and
Pierre-Olivier Weill (New York University)
A Model of Money with Multilateral Matching
Manolis Galenianos and Philipp Kircher (University of Pennsylvania)
Money and the Variety of Goods
Ken Burdett (University of Pennsylvania) and Andrei Shevchenko (Michigan State University)
Endogenously Segmented Markets in a Search-Theoretic Model of Monetary Exchange
Jonathan Chiu (University of Western Ontario) and Miguel Molico (Bank of Canada)
Bidding for Money
Benoit Julien (University of New South Wales), John Kennes (University of Copenhagen), and
Ian King (University of Otago)
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