Essays on market frictions and money

This dissertation consists of three essays on market frictions and money. In Chapter 1, we analyze the effect of money growth on long-run capital accumulation and production in case that there exist trading frictions in the capital market. We model liquidity demand for money that includes both speculative and precautionary purposes. The main result is that the relationship between money growth and capital accumulation can be either positive or negative depending on the degree of the frictions. If no friction exists in the capital market, inflation raised by an increase in money growth always has a negative real balance effect on capital accumulation. However, together with the capital market frictions, inflation may induce portfolio substitution out of money into capital, and this effect can be greater than the negative one. In Chapter 2, we present a price-posting monetary search model for studying endogenous trading frequency as well as prices. Here we show sellers\u27 price setting results in higher prices but more trades compared with the benchmark case in which buyers set prices and extract all trading surplus. This is because sellers under the price-posting mechanism internalizes a part of trading frequency of the economy while buyers in the benchmark case do not. It is also shown that technology progress under this pricing mechanism can lower down prices and facilitate trading at the same time while the trading frequency remains unchanged in the benchmark case. In the matter of the effects of monetary policy on this economy, we find an increase in money supply raise prices, but it also facilitates trading unless there are too many buyers. In Chapter 3, we present a fixed price search-theoretic model of monetary exchange to study endogenous specialization. Here we show under what conditions technology progress can explain historical deepening of specialization to some extent. In comparison between barter and monetary equilibrium, we find agents become more specialized by the use of money as in existing studies. We also find individual specialization decision does not depend on others\u27 level of specialization in the former while it does in the latter