Money and capital as competing media of exchange in a news economy
AbstractConventional theory suggests that fiat money will have value in capital-poor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-046.
Date of creation: 2009
Date of revision:
Other versions of this item:
- Fernando Martin & David Andolfatto, 2009. "Money and Capital as Competing Media of Exchange in a News Economy," Working Papers dp09-02, CRABE, Department of Economics, Simon Fraser University.
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-03 (All new papers)
- NEP-CBA-2009-10-03 (Central Banking)
- NEP-DGE-2009-10-03 (Dynamic General Equilibrium)
- NEP-MON-2009-10-03 (Monetary Economics)
You can help add them by filling out this form.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Money and Capital as Competing Media of Exchange in a News Economy
by Christian Zimmermann in NEP-DGE blog on 2010-06-28 11:10:13
- David Andolfatto & Fernando M. Martin, 2012.
"Information disclosure and exchange media,"
2012-012, Federal Reserve Bank of St. Louis.
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