On the Usefulness of the Constrained Planning Problemin a Model of Money

In this paper, we study a decentralized monetary economy witha speci…ed set of markets, rules of trade, an equilibrium concept, and a restricted setof policies and derive a set of equilibrium (monetary) allocations generated by thesepolicies. Next we set up a simpler constrained planning problem in which we restrictthe planner to choose from a set that contains the set of equilibrium allocations in thedecentralized economy. If there is a government policy that allows the decentralizedeconomy to achieve the constrained planner's allocation, then it is the optimal policychoice. To illustrate the power of such analyses, we solve such planning problems inthree monetary environments with limited communication. The upshot is that solvingconstrained planning problems is potentially an extremely "effcient" (easy and quick)way of deriving optimal policies for the corresponding decentralized economies.[...]