Efficient propagation of shocks and the optimal return on money

A comment on: “Efficient propagation of shocks and the optimal return on money”

“…The model is [2] except that lotteries are allowed in trade. Time is discrete, dated as t 0, and there is a unit nonatomic measure of agents.…”

“…, s t ). Let S t ≡ {s 0 } × {l, h} t denote the set of possible histories up to date t 2 Berentsen, Molico and Wright [1] are the first to introduce lotteries into matching models of money. 3 This over-production in turn leads to history-dependence.…”

“…Cavalcanti and Erosa [2] (CE, hereafter) study optima in a version of Trejos and Wright [4]. They introduce into it i.i.d.…”

“…We show that if lotteries are allowed, then higher ex ante utility is achieved and neither property holds at an optimum. 2 The role of lotteries in the CE setting is easily explained. Consider the situation in which the shock is such that the first-best level of output is high and in which the planner would like to weaken the seller IR constraint by making the current acquisition of money more valuable.…”

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AbstractLotteries are introduced into Cavalcanti and Erosa (2008) [2], a version of Trejos and Wright (1995) [4] with aggregate shocks. Lotteries improve welfare and eliminate the two notable features of the optimum with deterministic trades: over-production and history-dependence.

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