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Private money as a competing medium of exchange

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  • Pingle, Mark
  • Mukhopadhyay, Sankar

Abstract

By introducing costly centralized exchange into a traditional search theoretic decentralized market, where money can mediate trade, we show private money can arise endogenously because it is profitable for the centralized intermediary to satisfy the demand for money that will naturally arise. Trading money to another agent for a good, rather than trading good for good through the centralized intermediary, allows the money holder to obtain the good while avoiding the fee the centralized intermediary must charge to cover its costs. The model provides a set of pure strategy monetary equilibria where the quantity of privately issued money is a monotonically increasing function of the confidence agents have in money. The model indicates that the circulation of fiat money is explained by the role it can play in reducing transaction costs more so than the role it can play as a medium of exchange in resolving the double coincidence of wants problem.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 2 (June)
Pages: 541-554

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:2:p:541-554

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: Money Store Search theory;

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References

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  1. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  2. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
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  10. Peter Howitt, 2005. "Beyond Search: Fiat Money In Organized Exchange," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 405-429, 05.
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  13. 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.
  14. Gabriele Camera & Yiting Li, 2008. "Another Example of a Credit System that Co-Exists with Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1295-1308, 09.
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  16. Li, Yiting, 2001. "A Search Model of Money and Circulating Private Debt with Applications to Monetary Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 925-46, November.
  17. Shouyong Shi, 2006. "Viewpoint: A microfoundation of monetary economics," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 643-688, August.
  18. Camera, Gabriele, 2000. "Money, Search, And Costly Matchmaking," Macroeconomic Dynamics, Cambridge University Press, vol. 4(03), pages 289-323, September.
  19. Dean Corbae & Joseph Ritter, 2004. "Decentralized credit and monetary exchange without public record keeping," Economic Theory, Springer, vol. 24(4), pages 933-951, November.
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