Content area
Abstract
The goal of the dissertation is to modify the landmark model of Kiyotaki and Wright (1989), along several dimensions, in order to improve its applicability to the real world.
Chapter 1: IN GOD WE TRUST? On the implicit convertibility of fiat money. This chapter explains the casual observation that a fiat money's successful circulation is highly correlated with the existence of its issuing regime. By adding a government and a tax system to a Kiyotaki-Wright model, I model Adam Smith's idea that the government can create demand (and a value) for an intrinsically useless object by accepting it for tax payments. I interpret it as a mechanism of implicit convertibility—taxpayers convert fiat money into an immunity from the government's punishment. The unique legal status of fiat money as legal tender, and episodes from monetary history, support the theory.
Chapter 2: Directed search, money, and endogenous shops. This chapter shows that the basic insights of the Kiyotaki-Wright model do not require matching to be entirely random. The model assumes a search process that is half-directed and half-random: agents know where their desired goods are produced and can choose where to go, but their choice of a particular seller is random. The latter randomness ensures a role for money, while the directed part avoids the total chaos of the Kiyotaki-Wright model. The predictions of the model regarding commodity money and fiat money actually conform better with historical evidence than the Kiyotaki-Wright model.
Chapter 3: A computational macro model with multiple directed search. The Kiyotaki-Wright model is not applicable to actual policy analysis due to its very simple structure. Since such a structure is necessary for analytical tractability, I resort to pure computation in order to solve a full-fledged macro model—one that policy-makers may take seriously. With directed search in the market for goods and vacancies, investment, and unbounded holdings of assets, the model derives basic Keynesian results: money is generally non-neutral in the short-run; monetary policy has a control lag; a recession can result simply because agents prefer accumulating money to spending money (“the paradox of thrift”).
