In my dissertation, I investigate two fundamental macroeconomic issues that have not yet been given a fully satisfactory explanation: money, and unemployment. Neither money nor unemployment can be well-understood so as long as the analytical approach is restricted to the traditional Walrasian framework, in which all markets clear instantly. In an economy in which there are no frictions at all, all market activities can be made instantly and so there is no reason for either money or unemployment to exist. In my dissertation, I identify informational frictions as sources of market imperfections and investigate models in which money and unemployment arise endogenously. Special attention is given to the price determination processes. Particular attention is focussed upon the strategic bilateral bargaining and competitive screening price determination mechanisms: .

The first half of my dissertation focuses on monetary theory with special attention given to bilateral strategic bargaining. Before the path-breaking contributions by Kiyotaki and Wright (1989, 1991, 1993), the majority of monetary economists used models in which the presence of money isimposed artificially in an otherwise nonmonetary Walrasian model. The cash-in-advance model, for example, assumes that agents hold money because they have to. In my dissertation, I use a version of the search-theoretic model of money developed by Kiyotaki and Wright to study the implication of agents’ strategic behavior on the purchasing power of money. The aspect focused on is the presence of outside options in the bargaining process. In the existing literature, the purchasing power of money is determined by a reduced form of strategic bargaining in which the value of outside options is assumed to be either zero or some artificially imposed level. However, the value of outside options should reflect all of the information contained in the market since the search-theoretic model is a general equilibrium model. It is shown that the use of a reduced-form bargaining game is no longer justified once the value of outside options is endogenized. Moreover, there arises price dispersion, a pervasive market phenomenon that is not predicted by earlier such models..

The other half of my dissertation deals with unemployment. I reconsider the potential role that government intervention in the labor market can have in improving the level of economic activity. In the early literature, economists such as Keynes (1936) are optimistic about the effects of public policies on employment, even though their arguments receive little support from the modern theoretical literature. However, real-world observations give a different view: governments, especially in developing countries, routinely provide large-scale public employment programs. Using an overlapping generations model with production and asymmetric information, I look for a potential explanation for why such governments might want to provide jobs. The presence of unemployment is crucial to understanding the role of government in the labor market. If there is no unemployment, then the provision of public employment causes only a partial reallocation of the labor force from the private to the public sector. Thus, I investigate a model in which unemployment arises endogenously due to informational problems in the labor market. In such an economy, the government can attract part of the labor force at a wage rate that is lower than the private wage rate. I find two long-run equilibria. If the low-activity steady-state is regarded as being descriptive of a developing country, then the model suggests that the provision of public employment programs in developing countries may improve long-run economic activity. Also, it may help these economies get out of development traps.  The model also provides insights as to why, in developed economies, public employment programs may be harmful and why unemployment insurance programs have better results.