Money and competing assets under private information,Working Paper

Preliminary draft We study economies where buyers and sellers meet bilaterally and at random and where \u85at money competes with a one-period lived real asset as means of payment. The real asset can be in two states depending on its future dividend. We emphasize private information about asset fundamentals to explain the usefulness of \u85at money. We show that a monetary equilibrium exists irrespective of the quantity of the real asset in the economy. Moreover, the rate of return of the real asset is greater than the rate of return of \u85at money. Asset liquidityas measured by transaction velocityis endogenous and depends on fundamentals and policy. Buyers holding high-dividend assets refrain from using them as means of payment in order to signal their quality to the sellers. Asset liquidity declines as the asset becomes riskier or as ination decreases. Provided that the stock of the real asset is not too large and ination is not too small, the price of the real asset exhibits a liquidity premium that is a¤ected by monetary policy. Liquidity premia increase with ination. The optimal monetary policy is such that the liquidity premium and the velocity of the high-dividend asset are zero