How did it become possible to exchange apparently valueless pieces of paper for goods? This paper provides an equilibrium account of the transition between barter and fiat money regimes. The explanation relies on the intervention of a self-interested government which must be able to promise credibly to limit the issue of money. To achieve credibility, the government must offset the benefits of seigniorage by internalizing some of the macroeconomic externalities generated by the issue of fiat money. The government's patience and the extent of its involvement in the economy are key determinants of whether the transition can be accomplished.
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number
1994-004.
Length: Date of creation: 1994 Date of revision: Publication status: Published in American Economic Review, 85(1) March 1995, pp. 134-49 Handle: RePEc:fip:fedlwp:1994-004
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Milton Friedman & Anna J. Schwartz, 1987.
"Has Government Any Role in Money?,"
NBER Chapters,
in: Money in Historical Perspective, pages 289-314
National Bureau of Economic Research, Inc.
[Downloadable!]
Diamond, Peter A, 1984.
"Money in Search Equilibrium,"
Econometrica,
Econometric Society, vol. 52(1), pages 1-20, January.
[Downloadable!] (restricted)
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