I support the view that a monetary model should derive the existence of a medium of exchange endogenously rather than assume it (Wallace, International Economic Review 2001). Among the available basic models that achieve this goal, I follow those based on Kiyotaki and Wright (Journal of Political Economy 1989).
In Micro-Foundations of the Keynesian Multiplier I show that the multiplier, the foundation of Keynesian economics, is entirely consistent with strict micro-foundations, if one only uses the right micro-foundations. The Kiyotaki-Wright model offers all the necessary ingredients. Policy responses to shocks are often effective but sometimes might be harmful.
In
Money with Partially Directed Search [Journal of Monetary Economics 54(4), May 2007, 979-993], I modify the Kiyotaki-Wright model to include location choices. The predictions of the model regarding both commodity money and fiat money are thus improved. Proofs are in the working paper.In A Computable Macro Search Model the location choice of my directed search model is expanded to include choices of consumption vs. investment and working vs. employing. I combine directed search in both the labor market and the goods market with depreciable capital and unbounded holdings of money and capital. Some of the results, such as over-accumulation of capital in steady state, cannot be easily derived in simpler, analytically tractable models.
In The Tax-Foundation Theory of Fiat Money I model legal tender. Specifically, I model the acceptance of money by the government for tax payments, which is a central (but overlooked) feature of all modern legal tender laws. I show how and when this feature guarantees the money’s circulation. For an extensive discussion of relevant historical evidence and legal information, please check my Monetary History and Law page.