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Fiat money, intrinsic properties and government transaction policy

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Why do people coordinate on the use of valueless pieces of paper as generally accepted money? A possible answer is that these objects have intrinsic properties that make them better candidates to be used as media of exchange. Another answer stresses the fact that unconvertible fiat money will not easily appear unless there is a centralized institution that favors its use. The main objective of the paper is to analyze these questions. In order to do this, we take a model of commodity money in which fiat money does not play any significant role and modify it to examine under which circumstances fiat money might come to circulate as medium of exchange. Some of the results obtained from the model differ in a rather substantial way from previous related literature.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/504.pdf
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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 504.

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Date of creation: Sep 2000
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Handle: RePEc:upf:upfgen:504

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Web page: http://www.econ.upf.edu/

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Keywords: Fiat money; government policy; search theory;

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