THE EFFICIENCY OF MONETARY EXCHANGE IN SEARCH EQUILIBRIUM

Search theoretic models of money emphasize monetary exchange as the ou tcome of economic environments characterized by bilateral trading fric tions. This paper analyzes the efficiency of monetary exchange in a se arch model of fiat money where individuals invest costly effort in the exchange process. Because the optimal effort each individual trader i nvests in exchange is based upon the private rather than social gains from trade, decentralized monetary equilibria are shown to be ineffici ent relative to the social optimum. However, for an appropriate divisi on of the gains from trade given to buyers and sellers, it is possible to attain social efficiency. The nature of these search externalities for monetary exchange and their implications for policy are evaluated and discussed.