Selected Published Journal Articles
Wong, Y., & Wright, R. (2014). Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes.
International Economic Review
We study bilateral exchange, both direct trade and indirect trade that happens through chains of intermediaries or middlemen. We develop a model of this activity and present applications. This illustrates how, and how many, intermediaries get involved, and how the terms of trade are determined. We show how bargaining with one intermediary depends on upcoming negotiations with downstream intermediaries, leading to holdup problems. We discuss the roles of buyers and sellers in bilateral exchanges, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. In addition to contrasting our framework with other models of middlemen, we discuss the connection to different branches of search theory. We also illustrate how bubbles can emerge in intermediation.
Mattesini, F., Monnet, C., & Wright, R. (2013). Banking: A New Monetarist Approach.
Review of Economic Studies
Abstract: We study banking with minimal assumptions about who banks are or what they do. Our model is based on limited commitment. We show how it can be efficient for some agents to accept deposits and make delegated investments. This is so even if they have access to low return investments. The reason is their liabilities - claims on deposits - facilitate exchange between depositors and third parties. The predictions IC the theory are compared to the historical data.
Gu, C., & Wright, R. (2013). Endogenous Credit Cycles.
Journal of Political Economy
We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.
Rocheteau, G., & Wright, R. (2013). Liquidity and Asset Market Dynamics.
Journal of Monetary Economics
We study an economy with an essential role for liquid assets. The model can generate multiple stationary equilibria, across which asset prices, participation, stock market capitalization, output and welfare are positively related. Even when fundamentals are deterministic and time invariant, the model can generate a variety of non-stationary equilibria. This includes equilibria with price trajectories that resemble bubbles growing and bursting, as well as periodic, chaotic, and stochastic (sunspot) equilibria with recurrent market crashes. We analyze optimal liquidity provision. Sometimes it is e¢ cient to have enough liquid assets to satiate demand; other times it is better if liquidity is scarce.
(60), 275-294. doi: 10.1016/j.jmoneco.2012.11.002.
Lester, B., Postlewaite, A., & Wright, R. (2012). Information, Liquidity, Asset Prices, and Monetary Policy.
Review of Economic Studies
We study economies with multiple assets that are valued both for their return and their liquidity. Liquidity is modeled by having some trade occur in decentralized markets, with frictions, where certain assets are more likely to be accepted in trade. This is due to an information problem: while all agents recognize some assets, like currency, they are less sure about and hence less inclined to accept others. Recognizability is endogenized by letting agents invest in information, potentially generating multiple equilibria with different liquid-
ity properties. We discuss implications for asset pricing and monetary policy. We show in particular that what looks like a cash-in-advance constraint is not invariant to policy. We also discuss some tentative implications for understanding recent ?financial market events, such as the prediction that small changes in the amount of, or in the cost of, information concerning asset quality can generate large negative responses in liquidity, output and welfare.
(79), 1209-1238. doi: 10.1093/restud/rds003.
Head, Liu, Menzio, & Wright, R. (2012). Sticky Prices: A New Monetarist Approach. Journal of the European Economic Association
(10), 939-973. doi: 10.1111/j.1542-4774.2012.01081.x.
Aruoba, S., Waller, C., & Wright, R. (2011). Money and Capital.
Journal of Monetary Economics
The effects of money (anticipated inflation) on capital formation is a classic issue in macroeconomics. Previous papers adopt reduced-form approaches, putting money in the utility function, or imposing cash in advance, but using otherwise frictionless models. We follow instead a literature that tries to be explicit about the frictions making money essential. This introduces new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. These elements matter quantitatively and numerical results differ from findings in the reduced-form literature. The analysis also reduces a gap between microfounded monetary economics and mainstream macro.
(58), 98-116. doi: 10.1016/j.jmoneco.2011.03.003.
Liu, L., Wang, L., & Wright, R. (2011). The "Hot Potato" Effect of Inflation.
Conventional wisdom is that inflation makes people spend money faster, trying to get rid of it like a “hot potato,” and this is a channel through which inflation affects velocity and welfare. Monetary theory with endogenous search intensity seems ideal for studying this. However, in standard models, inflation is a tax that lowers the surplus from monetary exchange and hence reduces search effort. We replace search intensity with a free entry (participation) decision for buyers - i.e., we focus on the extensive rather than intensive margin - and prove buyers always spend their money faster when inflation increases. We also discuss welfare.
(15), 191-216. doi: 10.1017/S1365100511000046.
Lester, B., Postlewaite, A., & Wright, R. (2011). Liquidity and Information.
Journal of Money, Credit, and Banking
We study how recognizability affects assets’ acceptability, or liquidity. Some assets, like U.S. currency, are readily accepted because sellers can easily recognize their value, unlike stock certificates, bonds or foreign currency, say. This idea is common in monetary economics, but previous models deliver equilibria where less recognizable assets are always accepted with positive probability, never probability 0. This is inconvenient when prices are determined through bargaining, which is difficult with private information. We construct models where agents reject outright assets that they cannot recognize, at least for some parameters. Thus, information frictions generate liquidity differences without overly complicating the analysis.
(43), 355–377. doi: 10.1111/j.1538-4616.2011.00440.x.
Berentsen, A., Menzio, G., & Wright, R. (2011). Inflation and Unemployment in the Long Run.
American Economic Review
We study the long-run relation between money (inflation or interest rates) and unemployment. We document positive relationships between these variables at low frequencies. We develop a framework where money and unemployment are modeled using explicit microfoundations, providing a unified theory to analyze labor and goods markets. We calibrate the model and ask how monetary factors account for labor market behavior. We can account for a sizable fraction of the increase in unemployment rates during the 1970s. We show how it matters whether one uses monetary theory based on the search-and-bargaining approach or on an ad hoc cash-in-advance constraint
(101), 371-398. doi: 10.1257/aer.101.1.371.
Wright, R. (2010). A Uniqueness Proof for Monetary Steady State.
Journal of Economic Theory
The framework in Lagos and Wright (2005)  combining decentralized and centralized markets is used extensively in monetary economics. Much is known about that model, but there is a loose end: only under special assumptions about bargaining power or decentralized market preferences has it been shown that the monetary steady state is unique. For general decentralized market utility and bargaining, I prove uniqueness for generic parameters with fiat money, and for all parameters with commodity money. As a corollary, I get monotone comparative statics.
(145), 382-391. doi: 10.1016/j.jet.2009.11.004.
Guerrieri, V., Shimer, R., & Wright, R. (2010). Adverse Selection in Competitive Search Equilibrium.
We study economies with adverse selection, plus the frictions in competitive search theory. With competitive search, principals post terms of trade (contracts), then agents choose where to apply, and they match bilaterally. Search allows us to analyze the effects of private information on both the intensive and extensive margins (the terms and probability of trade). There always exists a separating equilibrium where each type applies to a different contract. The equilibrium is unique in terms of payoffs. We provide an algorithm for constructing equilibrium. Three applications illustrate the usefulness of the approach, and contrast our results with those in standard contract and search theory.
(78), 1823-1862. doi: 10.3982/ECTA8535.
Silviera, R., & Wright, R. (2010). Search and the Market for Ideas.
Journal of Economic Theory
We study a market where innovators, who are good at coming up with ideas, can sell them to entrepreneurs, who might be better at implementing them. The market is decentralized, with random matching and bargaining. Ideas are characterized by five salient features: they are indivisible; partially nonrival; intermediate inputs; subject to informational frictions; and difficult to collateralize. This last feature gives rise to a demand by entrepreneurs for liquidity. We determine which ideas get traded in equilibrium and compare this to the efficient outcome, emphasizing the impact of bargaining and liquidity considerations. Among other applications, we study how outcomes in the idea market affect the labor market.
(145), 1550-1573. doi: 10.1016/j.jet.2010.01.004.
Jean, K., Rabinovich, S., & Wright, R. (2010). On the Multiplicity of Monetary Equilibia: Green-Zhou Meets Lagos-Wright.
Journal of Economic Theory
Green and Zhou relax the assumption, made in early search-based models of monetary exchange, of indivisible money. Their paper and various extensions make much technical progress, and derive some interesting substantive results. In particular, they show there is an indeterminacy of steady-state monetary equilibria. We reconsider this result in the framework of Lagos and Wright, which is more tractable. We show that a similar multiplicity arises, and is much easier to derive and understand. We also compare the results to those in related nonmonetary models, and discuss how they depend on details, including the number of agents and the timing.
(145), 392-401. doi: 10.1016/j.jet.2009.03.006.
Rogerson, R., Visschers, L., & Wright, R. (2009). Labor Market Fluctuations in the Small and in the Large.
International Journal of Economic Theory
Shimer's calibrated version of the Mortensen–Pissarides model generates unemployment fluctuates much smaller than the data. Hagedorn and Manovskii present an alternative calibration that yields fluctuations consistent with the data, but this has been challenged by Costain and Reiter, who say it generates unrealistically big differences in unemployment from the differences in policy we see across countries. We argue this concern might be unwarranted, because one cannot assume that elasticities relevant for small changes work for large changes. Models with fixed factors in market or household production can generate large effects from small changes and reasonable effects from large changes. This is reminiscent of attempts to improve the labor market in the Kydland–Prescott model, especially ones incorporating household production, like Benhabib, Rogerson, and Wright.
(5), 125-137. doi: 10.1111/j.1742-7363.2008.00097.x.
Rocheteau, G., Rupert, P., Shell, K., & Wright, R. (2008). General Equilibrium with Nonconvexities and Money. Journal of Economic Theory
(142), 294-317. doi: http://dx.doi.org/10.1016/j.jet.2006.07.011.
He, P., Huang, L., & Wright, R. (2008). Money, Banking and Monetary Policy.
Journal of Monetary Economics
An important function of banks is to issue liabilities, like demand deposits, that are relatively safe and liquid. We introduce a risk of theft and a safe-keeping role for banks into modern monetary theory. This provides a general equilibrium framework for analyzing banking in historical and contemporary contexts. The model can generate the concurrent circulation of cash and bank liabilities as media of exchange, or inside and outside money. It also yields novel policy implications. For example, negative nominal interest rates are feasible, and for some parameters optimal; for other parameters, strictly positive nominal rates are optimal.
(55), 1013-1024. doi: 10.1016/j.jmoneco.2008.06.004.
Telyukova, I., & Wright, R. (2008). A Model of Money and Credit, with Application to the Credit Card Debt Puzzle.
Review of Economic Studies
Many individuals simultaneously have significant credit card debt and money in the bank. The credit card debt puzzle is as follows: given high interest rates on credit cards and low rates on bank accounts, why not pay down debt? While some economists go to elaborate lengths to explain this, we argue it is a special case of the rate of return dominance puzzle from monetary economics. We extend standard monetary theory to incorporate consumer debt, which is interesting in its own right since developing models where money and credit coexist is a long-standing challenge. Our model is quite tractable—for example, it readily yields nice existence and characterization results—and helps put into context recent discussions of consumer debt.
(75), 629-647. doi: 10.1111/j.1467-937X.2008.00487.x.
Rocheteau, G., Rupert, P., & Wright, R. (2007). Inflation and Unemployment in General Equilibrium.
Scandinavian Journal of Economics
When labor is indivisible, there exist efficient outcomes with some agents randomly unemployed, as in Rogerson (1988). We integrate this idea into the modern theory of monetary exchange, where some trade occurs in centralized markets and some in decentralized markets, as in Lagos and Wright (2005). This delivers a general equilibrium model of unemployment and money, with explicit microeconomic foundations. We show that the implied relation between inflation and unemployment can be positive or negative, depending on simple preference conditions. Our Phillips curve provides a long-run, exploitable, trade-off for monetary policy; it turns out, however, that the optimal policy is the Friedman rule.
(109), 837–855. doi: 10.1111/j.1467-9442.2007.00511.x.
Moscarini, G., & Wright, R. (2007). Interview with Peter Diamond. Macroeconomic Dynamics
(11), 543–565. doi: 10.1017/S1365100507060403.
Gamount, D., Schindler, M., & Wright, R. (2006). Equilibrium Wage Dispersion: An Example. The B.E. Journal of Macroeconomics
(6), 1534-5998. doi: 10.2202/1534-5998.1462.
Gaumont, D., Schindler, M., & Wright, R. (2006). Alternative Theories of Wage Dispersion.
European Economic Review
We analyze labor market models where the law of one price fails—i.e., models with equilibrium wage dispersion. We begin considering ex ante heterogeneous workers, but highlight a problem with this approach: If search is costly the market shuts down. We then assume homogeneous workers but ex post heterogeneous matches. This model is robust to search costs, and delivers equilibrium wage dispersion. However, we prove that the law of two prices holds: Equilibrium implies at most two wages. We explore other models, including one combining ex ante and ex post heterogeneity which is robust and delivers more realistic wage dispersion.
(50), 831-848, doi: 10.1016/j.euroecorev.2006.01.006.
Wright, R. (2005). Introduction to Models of Monetary Economies 2: The Next Generation. International Economic Review
(46), 305–316. doi: 10.1111/j.1468-2354.2005.00319.x.
Rocheteau, G., & Wright, R. (2005). Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium.
We compare three market structures for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We also extend work on the microfoundations of money by allowing a general matching technology and entry. We study how equilibrium and the effects of policy depend on market structure. Under bargaining, trade and entry are both inefficient, and inflation implies first-order welfare losses. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation may actually improve welfare. Under posting, the Friedman rule yields the first best, and inflation implies second-order welfare losses.
(73), 175-202. doi: 10.1111/j.1468-0262.2005.00568.x.
Submitted Working Papers
Wright, R., & Venkateswaran. (2012). A New Monetarist Model of Financial and Macro-economic Activity.
He, Wright, R., & Yu. (2011). Housing and Liquidity.
Wright, R., & Trejos. (2011). Money and Finance: An Integrated Approach.
Chiu, J., Meh, C., & Wright, R. (2011). Innovation and Growth with Financial, and Other, Frictions.
The generation and implementation of ideas, or knowledge, is crucial for economic performance. We study this process in a model of endogenous growth with frictions. Productivity increases with knowledge, which advances via innovation, and with the exchange of ideas from those who generate them to those best able to implement them (technology transfer). But frictions in this market, including search, bargaining, and commitment problems, impede exchange and thus slow growth. We characterize optimal policies to subsidize research and trade in ideas, given both knowledge and search externalities. We discuss the roles of liquidity and financial institutions, and show two ways in which intermediation can enhance efficiency and innovation. First, intermediation allows us to finance more transactions with fewer assets. Second, it ameliorates certain bargaining problems, by allowing entrepreneurs to undo otherwise sunk investments in liquidity. We also discuss some evidence, suggesting that technology transfer is a significant source of innovation and showing how it is affected by credit considerations.
Mattesini, & Wright, R. Friedman Meets Andolfatto.
Wright, R., Nosal, & Wong. A Generalized Model of Middlemen.
Wright, R., Choi, & Nakajima. Asset Pricing in Competitive Search Equilibrium.
Choi, & Wright, R. Retail Markets in Neoclassical Theory.
Mattesini, & Wright, R. Contracts and Liquidity.
Wright, R. Liquidity: A New Monetarist Approach.
Silviera, Wong, & Wright, R. The Venture Capital Cycle: A Model of Search and Bargaining.
Burdett, Dong, Sun, & Wright, R. Markets, Marriage and Money: A Coasian Theory of Household Formation.
Wright, R., Gu, & Mattesini. Money and Credit Redux.
Wright, R. Competitive Search: A Survey.
Wright, R., & Wong. Venture Capital: A Three-Sided Search-and-Bargaining Model.