Trejos-Wright with a 2-unit bound: existence and stability of monetary steady states

Paper number: 13/11

Paper date: 30 October 2013

Year: 2013

Paper Category: Discussion Paper

Authors

Pidong Huang and Yoske Igarashi

Abstract

This paper investigates a Trejos-Wright random matching model of money with a consumer take-it-or-leave-it offer and with individual money holdings in the set {0, 1, 2}. It is shown that three kinds of monetary steady state exist generically: (1) pure-strategy full-support steady states, (2) mixed-strategy full-support steady states, and (3) non-full-support steady states. A full-support steady state exists if and only if a non-full-support steady state exists. Stability of these steady states is also studied. Both pure-strategy and mixedstrategy full-support steady states are locally stable. However, nonfull-support steady states are unstable.

Keywords: random matching model; monetary steady state; local stability; determinacy; instability; Zhu (2003).
JEL classification: C62, C78, E40

Trejos-Wright with a 2-unit bound: existence and stability of monetary steady states Trejos-Wright with a 2-unit bound: existence and stability of monetary steady states