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A Model of Fiat Money and Barter

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  • Hayashi, Fumio
  • Matsui, Akihiko

Abstract

We present an infinite horizon model with capital in which fiat money and barter are two competing means of payment. Fiat money has value because barter is limited by the extent of a double coincidence of wants. The pattern of exchange generally involves both money and barter. We find that the Chicago rule is sufficient for Pareto efficiency, while nominal interest smoothing is necessary. For a specific utility function we provide a complete characterization of the patterns of exchange and calculate the range of inflation rates over which a stationary monetary equilibrium exists.

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Bibliographic Info

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

Volume (Year): 68 (1996)
Issue (Month): 1 (January)
Pages: 111-132

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Handle: RePEc:eee:jetheo:v:68:y:1996:i:1:p:111-132

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

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  1. Grandmont, Jean-Michel & Younes, Yves, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 40(2), pages 149-65, April.
  2. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  3. Shapley, Lloyd S. & Shubik, Martin, 1969. "On market games," Journal of Economic Theory, Elsevier, vol. 1(1), pages 9-25, June.
  4. Oh, Seonghwan, 1989. "A theory of a generally acceptable medium of exchange and barter," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 101-119, January.
  5. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 355-72, July.
  6. Chatterjee, S. & Corbae, D., 1991. "Endogenous Market Participation and General Equilibrium Value of Money," Working Papers 91-08, University of Iowa, Department of Economics.
  7. Engineer, Merwan & Bernhardt, Dan, 1991. "Money, Barter, and the Optimality of Legal Restrictions," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 743-73, August.
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Cited by:
  1. repec:ebl:ecbull:v:5:y:2005:i:3:p:1-5 is not listed on IDEAS
  2. Randall Wright, 2005. "Introduction to "Models of Monetary Economies II: The Next Generation"," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Oct, pages 2-9.
  3. Matsui, Akihiko, 1998. "Strong Currency and Weak Currency," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 305-333, December.
  4. Samuel E. Vazquez, 2009. "Scale Invariance, Bounded Rationality and Non-Equilibrium Economics," Papers 0902.3840, arXiv.org.
  5. Araujo, Luis & Camargo, Braz & Minetti, Raoul & Puzzello, Daniela, 2012. "The essentiality of money in environments with centralized trade," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 612-621.
  6. Krishna, R. Vijay, 2003. "Non-robustness of the Cash-in-Advance Equilibrium in the Trading-Post Model," Working Papers 9-03-2, Pennsylvania State University, Department of Economics.
  7. Brana, Sophie & Maurel, Mathilde, 1999. "Barter in Russia: Liquidity Shortage Versus Lack of Restructuring," CEPR Discussion Papers 2258, C.E.P.R. Discussion Papers.
  8. repec:ebl:ecbull:v:18:y:2002:i:1:p:1-11 is not listed on IDEAS
  9. Edward J. Green, 2002. "Payment Arrangements and Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 51-57, May.
  10. Deck, Cary A. & McCabe, Kevin A. & Porter, David P., 2006. "Why stable fiat money hyperinflates: Results from an experimental economy," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 471-486, November.
  11. Marvasti, A. & Smyth, David J., 1999. "The effect of barter on the demand for money: an empirical analysis," Economics Letters, Elsevier, vol. 64(1), pages 73-80, July.
  12. George Selgin, 2003. "Adaptive Learning and the Transition to Fiat Money," Economic Journal, Royal Economic Society, vol. 113(484), pages 147-165, January.
  13. R. Vijay Krishna, 2004. "Non-robustness of the Cash-in-advance Equilibrium in the Trading Post Model," Levine's Bibliography 122247000000000104, UCLA Department of Economics.

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