A Markov Model of Production, Trade, and Money: Theory and Artificial Life Simulation

The paper generalizes the Kiyotaki-Wright trade model by treat-ing the trading period as a finite game, so Nash’s theorem can be used to prove the existence of equilibrium, and by treating the economy as a Markov process, so an ergodic theorem can be used to show the ex-istence of equilibria with desirable properties (e.g., in which money exists). A Markov model of trade also allows us to add complex-ity to the economy without adding corresponding complexity to the analysis of the model’s properties. The paper also provides artificial life simulations of the Markov economy suggesting that monetary equilibria are dynamically stable and do not require high levels of learning or information processing on the part of agents. 1