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Existence of Uniqueness of "Money" in General Equilibrium: Natural Monopoly in the Most Liquid Asset

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Author Info
Ross Starr (University of California, San Diego)
Abstract

The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of economic general equilibrium in the presence of 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 trasaction cost) asset. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium, creating a natural monopoly. Trading posts using a medium of exchange create a network externality inducing others' adoption of the same medium. Bertrand monetary equilibria (among competing trading posts) and uniqueness of 'money' are robust to threats of entry. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments and sustains its natural monopoly through the scale of government economic activity.

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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 2002-20.

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Date of creation: 21 Nov 2002
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Handle: RePEc:cdl:ucsdec:2002-20

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Related research
Keywords: commodity money; fiat money; transaction cost; scale economy; couble coincidence of wants;

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  1. Rey, Helene, 2001. "International Trade and Currency Exchange," Review of Economic Studies, Blackwell Publishing, vol. 68(2), pages 443-64, April.
    Other versions:
  2. Kurz, Mordecai, 1974. "Equilibrium in a Finite Sequence of Markets with Transaction Cost," Econometrica, Econometric Society, vol. 42(1), pages 1-20, January. [Downloadable!] (restricted)
  3. 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)
  4. 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)
  5. Ostroy, Joseph M & Starr, Ross M, 1974. "Money and the Decentralization of Exchange," Econometrica, Econometric Society, vol. 42(6), pages 1093-1113, November. [Downloadable!] (restricted)
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  9. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September. [Downloadable!] (restricted)
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  10. Howitt, Peter & Clower, Robert, 2000. "The emergence of economic organization," Journal of Economic Behavior & Organization, Elsevier, vol. 41(1), pages 55-84, January. [Downloadable!] (restricted)
  11. Christian Hellwig, 2000. "Money, Intermediaries and Cash-in-Advance Constraints," FMG Discussion Papers dp349, Financial Markets Group. [Downloadable!] (restricted)
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  12. 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)
  13. 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)
  14. Marimon, Ramon & McGrattan, Ellen & Sargent, Thomas J., 1990. "Money as a medium of exchange in an economy with artificially intelligent agents," Journal of Economic Dynamics and Control, Elsevier, vol. 14(2), pages 329-373, May. [Downloadable!] (restricted)
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  15. Alchian, Armen A, 1977. "Why Money?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 133-40, February. [Downloadable!] (restricted)
  16. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February. [Downloadable!] (restricted)
  17. 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)
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