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]. Monetary spot trading is nearly efficient
when there is only a single perishable good (or a composite commodity) at each
date and state of the world; random shocks are idiosyncratic, privately observed, and
temporary; markets are competitive; and the agents are very patient. This result is a
fairly close analogue, for trade using outside, fiat money, of a recent characterization
by Levine and Zame [2002] of environments in which spot trade using inside money,
in the form of one-period debt payable in a commodity, is nearly Pareto efficient. We
also study an example where expansionary monetary mechanism Pareto dominates
laissez-faire or contractionary monetary mechanism in an environment with impatient
agents.
