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There Will Be Money

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  • Luis Araujo
  • Bernardo Guimaraes

Abstract

A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this article we argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, we show that the sheer belief that fiat money may become intrinsically useful, even if only in an almost unreachable state, might be enough to rule out nonmonetary equilibria. In a large region of parameters, agents' beliefs and behavior are completely determined by fundamentals.

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File URL: http://cep.lse.ac.uk/pubs/download/dp1004.pdf
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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1004.

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Date of creation: Sep 2010
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Handle: RePEc:cep:cepdps:dp1004

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Fiat money; autarky; equilibrium selection;

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  1. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, vol. 61(5), pages 989-1018, September.
  2. Albrecht Ritschl & Samad Salferaz, 2010. "Crisis?: What crisis?: currency vs. banking in the financial crisis of 1931," LSE Research Online Documents on Economics 28726, London School of Economics and Political Science, LSE Library.
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