Individual and Aggregate Real Balances in a Random‐Matching Model

TLDR

At such an equilibrium, agents' money holdings are endogenously determined and uniformly bounded. This article investigates the characteristics of stationary single-price equilibrium in a monetary random‑matching model where agents can hold an arbitrary amount of divisible money and where production is costly. A refinement of weakly undominated strategies is argued to be necessary. The study finds that if one equilibrium exists, a continuum of single-price equilibria indexed by aggregate real-money balance exists, and equilibria with different money-holdings upper bounds but identical aggregate balances can coexist.

Abstract

This article investigates the characteristics of stationary single‐price equilibrium in a monetary random‐matching model where agents can hold an arbitrary amount of divisible money and where production is costly. At such an equilibrium, agents' money holdings are endogenously determined and uniformly bounded. A refinement of weakly undominated strategies is argued to be necessary. It is shown that a continuum of single‐price equilibria indexed by the aggregate real‐money balance exists if one such equilibrium exists. Equilibria with different money‐holdings upper bounds, hence different distributions, but with identical aggregate real‐money balances can coexist.