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Author(s) -
Johri Alok
Publication year - 1999
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00023
Subject(s) - economics , time value of money , monetary economics , production (economics) , value (mathematics) , store of value , microeconomics , medium of exchange , velocity of money , endogenous money , currency , monetary policy , mathematics , finance , statistics
It is well known that models in which money is used as a medium of exchange to lubricate trading, frictions display multiplicity of equilibria. I show that the amount of activity varies as the value of money differs across these equilibria when production opportunities involve random fixed costs. When money has high value, trade is more profitable; therefore, there will be more agents engaged in trade relative to equilibria in which money has lower value. The higher‐activity equilibria display higher production not only because more is produced and exchanged per transaction but also because more transactions occur per period. This Diamond‐style result is obtained without increasing returns in the matching technology.