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Monetary General Equilibrium with Transaction Costs

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Author Info
Ross M. Starr
Abstract

Commodity money arises endogenously in a general equilibrium model with convex transaction cost technology and with separate budget constraints for each transaction. Transaction costs imply differing bid and ask (selling and buying) prices. The most liquid good --- with the smallest proportionate bid/ask spread --- becomes commodity money. General equilibrium may not be Pareto efficient, but if zero-transaction-cost money is available then the equilibrium allocation is Pareto efficient. Fiat money is an intrinsically worthless instrument. Its positive price comes from acceptability in paying taxes, and its use as a medium of exchange is based on low transaction cost.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number 2002-01r.

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Date of creation: Jul 2002
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Handle: RePEc:cdl:ucsdec:2002-01r

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  1. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August. [Downloadable!] (restricted)
  2. Li, Yiting & Wright, Randall, 1998. "Government Transaction Policy, Media of Exchange, and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 290-313, August. [Downloadable!] (restricted)
  3. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May. [Downloadable!] (restricted)
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  4. Pradeep Dubey & John Geanakoplos, 2000. "Inside and Outside Money, Gains to Trade, and IS-LM," Cowles Foundation Discussion Papers 1257R, Cowles Foundation, Yale University, revised Jun 2001. [Downloadable!]
  5. Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May. [Downloadable!] (restricted)
  6. Ross Starr, 2001. "Why Is There Money? Endogenous Derivation of "Money" as the Most Liquid Asset: A Class of Examples," University of California at San Diego, Economics Working Paper Series 2000-25R, Department of Economics, UC San Diego. [Downloadable!]
  7. Starr, Ross M, 1974. "The Price of Money in a Pure Exchange Monetary Economy with Taxation," Econometrica, Econometric Society, vol. 42(1), pages 45-54, January. [Downloadable!] (restricted)
  8. Banerjee, Abhijit V & Maskin, Eric S, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 955-1005, November. [Downloadable!] (restricted)
  9. Ostroy, Joseph M. & Starr, Ross M., 1990. "The transactions role of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 1, pages 3-62 Elsevier. [Downloadable!] (restricted)
  10. Abhijit V. Banerjee & Eric S. Maskin, 1996. "A Walrasian Theory of Money," Harvard Institute of Economic Research Working Papers 1753, Harvard - Institute of Economic Research.
  11. Starrett, David A, 1973. "Inefficiency and the Demand for "Money" in a Sequence Economy," Review of Economic Studies, Blackwell Publishing, vol. 40(4), pages 437-48, October. [Downloadable!] (restricted)
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