Research Database

In this appendix, we describe the numerical methods used to compute an equilibrium in the economy with an inelastic labor supply and in the economy with an elastic labor supply (i.e., our benchmark economy). Although the economy with inelastically supplied labor is a special case of the benchmark economy, the equilibrium in the inelastic labor supply case is much easier to compute and is therefore treated separately. In each case, we start with the consumer's problem, assuming the consumer takes prices as given. We then show how the equilibrium prices are determined. To verify that the methods work well with our problem, we apply them to some related test problems that have known solutions.

A random-matching model (of money) is formulated in which there is complete public knowledge of the trading histories of a subset of the population, called banks, and no public knowledge of the trading histories of the complement of that subset, called nonbanks. Each person, whether a banker or a non banker, is assumed to have the technological capability to create indivisible, distinct and durable objects called notes. If outside money is indivisible and sufficiently scarce, then an optimal mechanism is shown to have note issue and destruction (redemption) by banks.