A Dynamic Analysis of Nash Equilibria in Search Models with Fiat Money

TL;DR

This paper develops a method to analyze dynamic Nash equilibria in search models with fiat money, exploring stability, multiple equilibria, and liquidity conditions affecting money acceptance.

Contribution

It introduces a novel approach to determine equilibria in heterogeneous agent search models and addresses stability and multiple equilibria issues.

Findings

Liquidity conditions influence the transition to full fiat money acceptance.

Inflationary shocks impact production, liquidity, and trade.

The method clarifies stability properties of pure strategy equilibria.

Abstract

We study the rise in the acceptability fiat money in a Kiyotaki-Wright economy by developing a method that can determine dynamic Nash equilibria for a class of search models with genuine heterogenous agents. We also address open issues regarding the stability properties of pure strategies equilibria and the presence of multiple equilibria. Experiments illustrate the liquidity conditions that favor the transition from partial to full acceptance of fiat money, and the effects of inflationary shocks on production, liquidity, and trade.