Robustness of Stability to Cost of Carrying Money in a Matching Model of Money

Abstract

This paper studies stability of monetary steady states in a Trejos-Wright random matching model of money with the money holding set {0,1,2} and a cost of carrying money. Three steady states are generic: pure-strategy fullsupport steady state; mixed-strategy full-support steady state; and non-fullsupport steady state. Stability analysis shows that both full-support steady states are stable and determinate. The non-full-support steady state is stable and indeterminate if there is a sufficiently small positive carrying cost. The non-full-support steady state becomes unstable if the carrying cost is zero.