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A contribution to the pure theory of money

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  • Nobuhiro Kiyotaki
  • Randall Wright

Abstract

We analyze a general equilibrium model with search frictions and differentiated commodities. Because of the many differentiated commodities, barter is difficult because it requires a double coincidence of wants, and this provides a medium of exchange role for fiat money. We prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment, including imposing transactions costs, storage costs, and taxes on the use of money. Rate of return dominance, liquidity, and the potential welfare improving role of fiat money are discussed.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 123.

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Date of creation: 1989
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Publication status: Published in Journal of Economic Theory (Vol. 53, n.2, April 1991, pp. 215-235)
Handle: RePEc:fip:fedmsr:123

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Keywords: Money theory;

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References

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  1. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-75, August.
  2. Jovanovic, Boyan & Rosenthal, Robert W., 1988. "Anonymous sequential games," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 77-87, February.
  3. Diamond, Peter A, 1984. "Money in Search Equilibrium," Econometrica, Econometric Society, vol. 52(1), pages 1-20, January.
  4. John Bryant & Neil Wallace, 1980. "A suggestion for further simplifying the theory of money," Staff Report 62, Federal Reserve Bank of Minneapolis.
  5. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Oh, Seonghwan, 1989. "A theory of a generally acceptable medium of exchange and barter," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 101-119, January.
  7. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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