Money and Competing Assets under Private Information

This paper studies random-matching economies where …at money coexists with a real asset, and no restrictions are imposed on payment arrangements. The real asset is partially illiquid due to informational asymmetries about its fundamental value. The extent to which the real asset is used as means of payment depends on the variance of its dividend as well as monetary policy. The e¤ects of in‡ation on payment arrangements, asset prices, and welfare are analyzed. Keywords: Fiat money, payments, private information, liquidity, asset prices J.E.L. Classi…cation: D82, D83, E40, E50 I thank for their comments and suggestions Murali Agastya, Aditya Goenka, Yiting Li, Ed Nosal, Peter Rupert, Neil Wallace, Pierre-Olivier Weill, Asher Wolinsky, Tao Zhu and seminar participants at the Federal Reserve Bank of Cleveland, National Taiwan University, National University of Singapore, Singapore Management University, the Southern Workshop in Macroeconomics (Auckland), and the University of California at Irvine. I also thank Patrick Higgins for his research assistance. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System. E-Mails: [email protected] and [email protected].