ABSTRACT
In the basic search-theoretic approach to money, 2 as in most sophisticated models which have followed, the quantity of money is given exogenously. That starting point is unsatisfactory and misleading. It is responsible for ascribing the existence of monetary equilibrium to bootstrap effects only. In fact, it turns out that some intrinsic properties of the economy, such as tastes and technology, are very important, and not merely beliefs. Moreover, assuming an exogenous quantity of money contradicts the now widely held opinion that monetary authorities do not have the power to directly determine the quantity of money but only to indirectly control it by manipulating some other variable, namely the rate of interest. Monetary models should account for the important ‘stylized fact’ that money is issued at agents’ request under the constraint of rules fixed by a non competitive authority. The purpose of this essay is to propose an elementary version of such a model.
