When is it efficient to use money, or other assets, as a payment instruments, either as media of exchange or as collateral for deferred settlement? To discuss this, we need a framework with explicit frictions (e.g., spatial or temporal separation; limited commitment; imperfect information). Institutions like money, collateralized credit, banking, etc. are clearly not captured well by standard GE theory. Search theory is the natural approach because it has agents trading with each other at terms they choose. In this setting we can ask how frictions impede the process of exchange and how the above-mentioned institutions may ameliorate the problem. The claim is that frictions matter for theory, for understanding data, and for policy analysis.
Course description – Slides 1 – 2 – 3 – 4 – 5