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We construct a tractable ‘fundamental’ model of money with equilibrium heterogeneity in money balances and prices. We do so by considering randomized monetary trades in a standard search-theoretic model of money where agents can hold multiple units of indivisible ‘tokens’ and can offer lotteries on monetary transfers. By studying a simple trading pattern, we can analytically characterize the monetary distribution. Interestingly, such distributions match those observed in numerically simulated economies with fully divisible money and price heterogeneity.


This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Economic Theory, volume 24, issue 4, in 2004 following peer review. The final publication is available at Springer via DOI: 10.1007/s00199-004-0485-5

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