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Why is there Money? Convergence to a Monetary Equilibrium in a General Equilibrium Model with Transaction Costs

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  • Ross Starr

    (University of California)

Abstract

This paper presents a class of examples where a nonmonetary economy converges in a tatonnement process to a monetary equilibrium. Exchange takes place in organized markets characterized by an array of trading posts where each pair of goods may be traded for one another. A barter equilibrium with m commodities is characterized by m(m-1)/2 commodity pair trading posts, most of which host active trade. A monetary equilibrium with unique money is characterized by active trade concentrated on m-1 posts, those trading in 'money' versus the m-1 nonmonetary commodities. There are two distinct sources of monetization: absence of double coincidence of wants and scale economies in transaction costs. As households discover that some pairwise markets (those dealing in the 'natural' money or those with high trading volumes) have lower transaction costs, they restructure their trades to take advantage of the low cost. Use of media of exchange arises endogenously from their low transaction cost. Uniqueness of the medium of exchange in equilibrium results from scale economies in the transaction technology.

Suggested Citation

  • Ross Starr, 2000. "Why is there Money? Convergence to a Monetary Equilibrium in a General Equilibrium Model with Transaction Costs," Econometric Society World Congress 2000 Contributed Papers 0058, Econometric Society.
    • Handle: RePEc:ecm:wc2000:0058
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    References listed on IDEAS

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    1. Meenakshi Rajeev, 1999. "Markeless Set-Up vs Trading Posts : A Comparative Analysis," Annals of Economics and Statistics, GENES, issue 53, pages 197-211.
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    7. 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.
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    Cited by:

    1. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.

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