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INSIDE MONEY, ORGANIZED MARKETS, AND SPECIALIZATION

Published online by Cambridge University Press:  26 April 2007

YITING LI
YITING LI
Affiliation:
National Taiwan University
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Abstract

We consider an economy in which people choose between a random-matching sector and organized markets absent double-coincidence problems. Merchants in the organized markets issue bills of exchange. Pareto-ranked multiple equilibria exist with the extent of the market and circulation of private liabilities endogenously determined. If trade frictions are moderate, bills circulate as a general medium of exchange, and the level of specialization is higher relative to barter. In this case, higher inside liquidity is accompanied by more specialization. When all transactions take place in the organized markets, trading risk vanishes and the economy achieves complete specialization.

Keywords

Inside MoneyMarketIntermediationSpecialization
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 11 , Issue 3 , June 2007 , pp. 388 - 404
Copyright
© 2007 Cambridge University Press

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