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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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Author Info
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

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File URL: http://hdl.handle.net/10.1007/s00199-002-0326-3
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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 21 (2003)
Issue (Month): 2 (03)
Pages: 455-474
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Handle: RePEc:spr:joecth:v:21:y:2003:i:2:p:455-474

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

Cited by:
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  1. Ross Starr, 2006. "Commodity Money Equilibrium in a Walrasian Trading Post Model: An Example," University of California at San Diego, Economics Working Paper Series 2005-06R, Department of Economics, UC San Diego. [Downloadable!]
  2. Zeira, Joseph, 2005. "Money and the Size of Transactions," CEPR Discussion Papers 5010, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Ross Starr, 2007. "Equilibrium and Media of Exchange in a Convex Trading Post Economy With Transaction Costs," University of California at San Diego, Economics Working Paper Series 2005-07R3, Department of Economics, UC San Diego. [Downloadable!]
  4. Ross Starr, 2005. "Commodity Money Equilibrium in a Walrasian Trading Post Model: An Elementary Example," University of California at San Diego, Economics Working Paper Series 2005-06, Department of Economics, UC San Diego. [Downloadable!]
  5. Michael B. Devereux & Shouyong Shi, 2008. "Vehicle Currency," Working Papers tecipa-315, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  6. Ross Starr, 2008. "Commodity Money in a Convex Trading Post Sequence Economy," University of California at San Diego, Economics Working Paper Series 2008-09, Department of Economics, UC San Diego. [Downloadable!]
  7. Ross Starr, 2007. "Equilibrium and Media of Exchange in A Convex Trading Post Economy with Transaction Cost," University of California at San Diego, Economics Working Paper Series 2005-07R2, Department of Economics, UC San Diego. [Downloadable!]
  8. Ross Starr, 2006. "Equilibrium and Media of Exchange in a Convex Trading Post Economy with Transaction Costs," University of California at San Diego, Economics Working Paper Series 2005-07R, Department of Economics, UC San Diego. [Downloadable!]
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