Staff Report 222

Individual and Aggregate Real Balances in a Random-Matching Model

Ruilin Zhou

Revised January 1, 1998

This paper 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.

Published In: International Economic Review (Vol. 40, No. 4, November 1999, pp. 1009-1038)

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