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A Theory of Money and Financial Institutions. Part V. The Rate of Interest on Fiat Money in a Closed Economy

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Author Info
Martin Shubik () (Cowles Foundation, Yale University)

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Abstract

In a well controlled monetary economy with no uncertainty and a money market, money is not merely a veil, it is a cocoon. There are no idle cash balances in a competitive monetary economy with a money market without uncertainty. The presence of uncertainty calls for the holding of cash. In a trading economy with perfect foresight, without taxes, but with traders having positive time discounts the rate of interest on paper money is positive. With uncertainty, fiat money is a form of insurance or generalized futures contract. The mathematical differences among static general equilibrium theory, a theory of money in a static general equilibrium context with perfect foresight and an evolutionary system are essentially the differences among maximization subject to equalities; convex programming and dynamic programming. They are needed for current transactions or are loaned.

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File URL: http://cowles.econ.yale.edu/P/cd/d03a/d0338.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 338.

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Length: 50 pages
Date of creation: 1972
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Handle: RePEc:cwl:cwldpp:338

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Martin Shubik, 1973. "The General Equilibrium Model is the Wrong Model and a Noncooperative Strategic Process Model is a Satisfactory Model for the Reconciliation of Micro and Macroeconomic Theory," Cowles Foundation Discussion Papers 365, Cowles Foundation, Yale University. [Downloadable!]
  2. Martin Shubik, 1973. "A Theory of Money and Financial Institutions. Part XII. A Dynamic Economy with Fiat Money Without Banking and With and Without Production Goods," Cowles Foundation Discussion Papers 364, Cowles Foundation, Yale University. [Downloadable!]
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