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Indivisible goods and fiat money

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  • Jorge Rivera C.
  • Michael Florig

Abstract

Although fiat money is useless in standard Arrow-Debreu models, in this paper we will show that this general conclusion does not hold true when goods are indivisible. In our setting, fiat money is valuable because it facilitates exchange, its price will always be positive and equilibrium allocations will change with the distribution of fiat money even though it does not directly yield utility through consumer preferences. Since a Walrasian equilibrium does not necessarily exist when goods are indivisible, a new equilibrium concept - called a rationing equilibrium - is introduced and its existence is proven under weak assumptions on the economy. A rationing equilibrium is a Walrasian equilibrium for all generic fiat money distributions.

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Paper provided by University of Chile, Department of Economics in its series Working Papers with number wp212.

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Date of creation: Jan 2005
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Handle: RePEc:udc:wpaper:wp212

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Web page: http://www.econ.uchile.cl/
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Keywords: competitive equilibrium; indivisible goods; fiat money.;

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  1. Douglas Gale & Martin Hellwig, 1984. "A General-Equilibrium Model of the Transactions Demand for Money," STICERD - Theoretical Economics Paper Series 100, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Shapley, Lloyd & Scarf, Herbert, 1974. "On cores and indivisibility," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 23-37, March.
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  8. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  9. Konovalov, A., 1998. "Core Equivalence in Economies With Satiation," Discussion Paper 1998-80, Tilburg University, Center for Economic Research.
  10. P. A. Diamond, 1982. "Money in Search Equilibrium," Working papers 297, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis.
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  13. Kajii, Atsushi, 1996. "How to discard non-satiation and free-disposal with paper money," Journal of Mathematical Economics, Elsevier, vol. 25(1), pages 75-84.
  14. Balasko, Yves, 1982. "Equilibria and efficiency in the fixprice setting," Journal of Economic Theory, Elsevier, vol. 28(1), pages 113-127, October.
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  17. Broome, John, 1972. "Approximate equilibrium in economies with indivisible commodities," Journal of Economic Theory, Elsevier, vol. 5(2), pages 224-249, October.
  18. Martine Quinzii, 1982. "Core and Competitive Equilibria with Indivisibilities," Cowles Foundation Discussion Papers 644, Cowles Foundation for Research in Economics, Yale University.
  19. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
  20. Dreze, Jacques H. & Muller, Heinz, 1980. "Optimality properties of rationing schemes," Journal of Economic Theory, Elsevier, vol. 23(2), pages 131-149, October.
  21. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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