Advertisement

Experimental Economics

, Volume 19, Issue 3, pp 595–612 | Cite as

Does money impede convergence?

  • John D. HeyEmail author
  • Daniela Di Cagno
Original Paper

Abstract

Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of non-monetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.

Keywords

Clearing house mechanism Double auction mechanism Experimental markets Money Monetised trading Non-monetised trading 

JEL Classifications

C92 D40 E24 

Notes

Acknowledgments

The authors would like to express their gratitude to Andrea Lombardo for writing the software in Visual Studio for these experiments. We also thank LUISS for use of their purpose-built laboratory, run under the auspices of CESARE. Finally we would like to thank the Editor and three referees for invaluable comments which led to significant changes in the paper.

Supplementary material

10683_2015_9456_MOESM1_ESM.docx (39 kb)
Supplementary material 1 (DOCX 38 kb)

References

  1. Barro, R. J., & Grossman, H. I. (1971). A general disequilibrium model of income and employment. American Economic Review, 61, 82–93.Google Scholar
  2. Benassy, J.-P. (1975). Neo-keynesian disequilibrium theory in a monetary economy. Review of Economic Studies, 42, 203–220.CrossRefGoogle Scholar
  3. Cason, T. N., & Friedman, D. (2008). A comparison of market institutions. In C. R. Plott & V. L. Smith (Eds.), Handbook of experimental economics results (Vol. 1, pp. 264–272). Amsterdam: Elsevier.Google Scholar
  4. Clower, R. W. (1967). A reconsideration of the microfoundations of monetary theory. Economic Inquiry, 6, 1–8.CrossRefGoogle Scholar
  5. Crockett, S., Oprea, R., & Plott, C. R. (2011). Extreme walrasian dynamics: The gale example in the lab. American Economic Review, 101, 3196–3220.CrossRefGoogle Scholar
  6. Friedman, D. (1993). How trading institutions affect financial market performance: Some laboratory experiments. Economic Inquiry, 31, 410–435.CrossRefGoogle Scholar
  7. Gjerstad, S. (2013). Price dynamics in an exchange economy. Economic Theory, 52, 461–500.CrossRefGoogle Scholar
  8. Goeree, J. K. and Lindsay, L. (2012a), Designing Package Markets to Eliminate Exposure Risk, University of Zurich Working Paper 71.Google Scholar
  9. Goeree, J. K. and Lindsay, L. (2012b), Stabilizing the Economy: Market Design and General Equilibrium, University of Zurich Working Paper.Google Scholar
  10. Greiner, B. (2004), The Online Recruitment System ORSEE 2.0—A Guide for the Organization of Experiments in Economics. University of Cologne, Working Paper Series in Economics 10.Google Scholar
  11. Hey, J. D., & Di Cagno, D. (1998). Sequential markets: An experimental investigation of Clower’s dual decision hypothesis. Experimental Economics, 1, 63–87.CrossRefGoogle Scholar
  12. Kiyotaki, N., & Wright, R. (1989). On money as a medium of exchange. Journal of Political Economy, 97, 927–954.CrossRefGoogle Scholar
  13. Leijonhufvud, A. (1968). On keynesian economics and the economics of keynes. Oxford: Oxford University Press.Google Scholar
  14. Lucas, R. E, Jr. (1980). Equilibrium in a pure monetary economy. Economic Inquiry, 18, 203–220.CrossRefGoogle Scholar
  15. Ostroy, J. M., & Starr, R. M. (1974). Money and the decentralization of exchange. Econometrica, 42, 1093–1113.CrossRefGoogle Scholar
  16. Shapley, L., & Shubik, M. (1977). Trade using one commodity as a means of payment. Journal of Political Economy, 85, 937–968.CrossRefGoogle Scholar

Copyright information

© Economic Science Association 2015

Authors and Affiliations

  1. 1.Department of Economics and Related StudiesUniversity of York, HeslingtonYorkUK
  2. 2.LUISSRomeItaly

Personalised recommendations