The reeded edge and the Phillips curve: Money neutrality, common knowledge, and subjective beliefs

I present in Simple two-person auction model in which a seller and a buyer make bids in terms of money; however: the value of a unit of money is uncer tain. I show: (1) a monetary revaluation has purely nominal effects if and only if it is common knowledge: (2) if seller and buyer have identical beli efs, making the value of money common knowledge maximizes total gains from trade; (3) if seller and buyer are equally well informed and have identical beliefs, then monetary revaluations have no net effect. (4) when the selle r knows the value of money but the buyer does not, the expected utilities o f both seller and buyer are proportional to 1/(1 + sigma(2)), where sigma i s the standard deviation of the value of money expressed as a Fraction of t he mean; and iii when beliefs are subjective, monetary policy can improve t otal gains from trade, as in Friedman's explanation of the Phillips curve. and an optimal level of inflation can be determined. Journal of Economic Li terature Classification Numbers: C78, E52. (C) 1999 Academic Press.