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Money and capital as competing media of exchange

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  • Lagos, Ricardo
  • Rocheteau, Guillaume

Abstract

We construct a model where capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman Rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 142 (2008)
Issue (Month): 1 (September)
Pages: 247-258

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Handle: RePEc:eee:jetheo:v:142:y:2008:i:1:p:247-258

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  2. S. Boragan Aruoba & Christopher J. Waller, 2005. "Money and Capital," 2005 Meeting Papers 550, Society for Economic Dynamics.
  3. Abhijit V. Banerjee & Eric S. Maskin, 1996. "A Walrasian Theory of Money," Harvard Institute of Economic Research Working Papers 1753, Harvard - Institute of Economic Research.
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  5. Banerjee, Abhijit V & Maskin, Eric S, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 955-1005, November.
  6. S. Boragan Aruoba & Randall Wright, 2002. "Search, money and capital: a neoclassical dichotomy," Working Paper 0208, Federal Reserve Bank of Cleveland.
  7. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2636-2655, November.
  8. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2001. "Cigarette Money," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 117-142, July.
  9. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
  10. Thomas J. Sargent & Neil Wallace, 1983. "A model of commodity money," Staff Report 85, Federal Reserve Bank of Minneapolis.
  11. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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  1. On Cows and Central Tenets of Capitalism!
    by paragwaknis in Musings of the Sorts on 2013-11-30 18:48:31
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