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A Financial Crisis In A Monetary Economy

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Executive Summary

The authors generalize Lagos and Wright's (2005) framework for a monetary economy in a way that there exist two technologies, "High" and "Low," for producing the goods in a decentralized matching market. The high technology is more productive than the low technology, while the agents who use the high technology cannot commit in advance to deliver the goods. The lack of commitment makes it infeasible to produce the goods with the high technology if trade is conducted via a simple cash payment. To use the high technology, private valuable assets, e.g., residential property should be put up as a "Hostage" ? la Williamson (1983) in the transaction.

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