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Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples

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  • Ross M. Starr

Abstract

The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of an economic general equilibrium. Monetary structure can be derived from price theory in a modified Arrow-Debreu model. Two constructs are added: transaction costs and market segmentation in trading posts (with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • Ross M. Starr, 2003. "Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 455-474, March.
    • Handle: RePEc:spr:joecth:v:21:y:2003:i:2:p:455-474
    DOI: 10.1007/s00199-002-0326-3
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    Keywords

    Keywords and Phrases: Commodity money; Fiat money; Transaction cost; Scale economy; Double coincidence of wants.; JEL Classification Numbers: E40; D50.;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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