Rationality and Stability of Equilibrium in a Search-Theoretic Model of Money

Abstract

In this short note, I examine the rationality of money-search equilibrium in a basic second-generation money search model, which is a perfectly divisible goods and indivisible money model. I then show that only an inflationary economy can generate a socially and individually rational stable equilibrium. On the basis of this finding, I demonstrate that there is no loss of generality in an analysis that assumes dictatorial buyers in an inflationary economy, since the properties of a dictatorial buyers model are identical to those of a general inflationary economy model. The result of this paper is especially useful for empirical applications since we are generally incapable of finding data showing bargaining power. This result also alerts us against employing the second-generation model to analyze a deflationary economy and commodity money.