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The Mechanism-Design Approach to Monetary Theory

In: Handbook of Monetary Economics

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  • Wallace, Neil

Abstract

The mechanism-design approach to monetary theory is the search for fruitful settings in which money is necessary for the achievement of some desirable allocations. Fruitfulness means that the settings provide insights about puzzling observations and policy questions. Settings with three frictions are considered: imperfect monitoring, costly connections among people, and imperfect recognizability of assets. An illustrative model with those frictions is used to explain as an optimum the following features of actual economies: currency is a uniform object, currency is (usually) dominated in rate of return, some transactions are accomplished using currency and others are accomplished in other ways.

Suggested Citation

  • Wallace, Neil, 2010. "The Mechanism-Design Approach to Monetary Theory," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 1, pages 3-23, Elsevier.
    • Handle: RePEc:eee:monchp:3-01
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    More about this item

    Keywords

    Money; Frictions; Inside-money; Mechanism-design; Monetary and Fiscal policy; Outside-money;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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