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Money, Barter, and the Optimality of Legal Restrictions

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  • Engineer, Merwan
  • Bernhardt, Dan

Abstract

We examine a decentralized monetary economy in which households can use a means of exchange (barter or gold) other than fiat money. The alternative means of exchange may drive out money even if monetary exchange Pareto dominates. Legal restrictions prohibiting other means of exchange may therefore be necessary. With stochastic preferences, households may use barter to supplement monetary purchases when they have an unexpectedly high demand. However, this may drive down the value of money (in all states) so low that households are again better off with fiat money alone. The paper provides both stochastic and nonstochastic examples in which eliminating markets for goods or assets that compete with fiat money improves welfare. Copyright 1991 by University of Chicago Press.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 99 (1991)
Issue (Month): 4 (August)
Pages: 743-73

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Handle: RePEc:ucp:jpolec:v:99:y:1991:i:4:p:743-73

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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
  2. Chen, Shikuan & Kao, Yi-Cheng, 2010. "Money, barter, and consumption interdependence," Economics Letters, Elsevier, vol. 106(2), pages 119-121, February.
  3. 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.
  4. Engineer, Merwan & Shouying Shi, 1998. "Asymmetry, imperfectly transferable utility, and the role of fiat money in improving terms of trade," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 153-183, February.
  5. Shi, Shouyong, 1999. "Money, capital, and redistributive effects of monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 565-590, February.
  6. Fumio Hayashi & Akihiko Matsui, 1994. "A Model of Fiat Money and Barter," NBER Working Papers 4919, National Bureau of Economic Research, Inc.
  7. Matsui, Akihiko, 1998. "Strong Currency and Weak Currency," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 305-333, December.
  8. Wilfredo Toledo, 2006. "El dinero en los modelos macroeconómicos," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 8(15), pages 97-116, July-Dece.

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