Money and Memory: Implicit Agents in Search Theories of Money

By Heiner Ganßmann

http://d.repec.org/n?u=RePEc:kas:poabec:2010-9&r=dge

Recent search theoretical models of monetary economies promise micro-foundations and thus a decisive improvement in the theory of money compared to the traditional mainstream approach that starts from a Walrasian general equilibrium framework to introduce money exogenously at the macro level. The promise of micro-foundations is not fulfilled, however. It can be shown that search models implicitly refer to central, most likely collective, agents doing essential work to sustain the monetary economy.

The goal of money search theory is to provide microfoundations for the use on money in macro models and thus avoid ad hoc assumptions. This paper claims this theory is still using ad hoc assumptions, specifically about the acceptance of money. I think there are two main first is that one needs to know whether an agents has accepted money in the past to decide whether to transact with him. The reason is that you want to exclude those who do not accept money. But why would you refuse money from someone if you know you could use it to buy something from someone else?

The second point has more traction, I think. A substantial part of money used in real time is not physical and requires somebody to keep track of it. Thus trust comes into play. Is this check covered? Is there a sufficient balance on this debit card? This requires new institutions that are not modeled is money search models.

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One Response to Money and Memory: Implicit Agents in Search Theories of Money

  1. heiner ganssmann says:

    maybe I was not clear enough in my text, but in any case, I still think the first point is valid. The question is not that one would not want to accept money from a given, randomly met buyer. The question is whether one can safely accept money at all. Whoever accepts money has to believe that others will accept it in the future. Therefore, for the system to function, those who do not accept money have to be excluded. The safest way to do this is to exclude anybody who is known not to have accepted money. But that information needs to be provided, by the memory bank or whatever.

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