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

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  • Starr, Ross M.
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    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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    Bibliographic Info

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt660465rm.

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    Date of creation: 21 Nov 2002
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    Handle: RePEc:cdl:ucsdec:qt660465rm

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

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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.
    2. Rey, Hélène, 1999. "International Trade and Currency Exchange," CEPR Discussion Papers 2226, C.E.P.R. Discussion Papers.
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    4. 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.
    5. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
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    8. Joseph M. Ostroy & Ross M. Starr, 1973. "Money and the Decentralization of Exchange," Cowles Foundation Discussion Papers 349, Cowles Foundation for Research in Economics, Yale University.
    9. 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.
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    14. Alchian, Armen A, 1977. "Why Money?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 133-40, February.
    15. 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.
    16. Starrett, David A, 1973. "Inefficiency and the Demand for "Money" in a Sequence Economy," Review of Economic Studies, Wiley Blackwell, vol. 40(4), pages 437-48, October.
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