Money and Capital as Competing Media of Exchange in a News Economy
AbstractConventional theory suggests that fiat money will have value in capitalpoor 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 Department of Economics, Simon Fraser University in its series Discussion Papers with number dp09-02.
Date of creation: Sep 2009
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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Other versions of this item:
- David Andolfatto & Fernando M. Martin, 2009. "Money and capital as competing media of exchange in a news economy," Working Papers 2009-046, Federal Reserve Bank of St. Louis.
- 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-2010-06-26 (All new papers)
- NEP-CBA-2010-06-26 (Central Banking)
- NEP-DGE-2010-06-26 (Dynamic General Equilibrium)
- NEP-MAC-2010-06-26 (Macroeconomics)
- NEP-MON-2010-06-26 (Monetary Economics)
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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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