Why fiat money is a safe asset
AbstractThis paper presents a model in which (1) fiat money has strictly positive value in the unique trembling hand equilibrium. This holds as each bank note is both: (a) a witness for the existence of some agent in the economy with debt, backed by collateral, and (b) the only matter that allows the debtor to settle her debt. The fear to lose the collateral creates future money demand by the debtor and thereby ensures positive money value. (2) Money is a safe asset as not only a single but all debtors in the economy demand money so that idiosyncratic shocks to solvency wash out. By this mechanism, fiat money is essentially equivalent to large securitized pools of debt which (3) can establish the pooling allocation even if pooling itself is infeasible.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 116 (2012)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/ecolet
Fiat money; Securitization; Safe asset; Collateral;
Find related papers by JEL classification:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
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