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The Transition from Barter to Fiat Money

  • Ritter, Joseph A

How did it become possible to exchange apparently valueless pieces of paper for goods? This paper provides an equilibrium account of the transition between barter and fiat-money regimes. The explanation relies on the intervention of a self-interested government that must be able to promise credibly to limit the issue of money. To achieve credibility, the government must offset the benefits of seigniorage by internalizing some of the macroeconomic externalities generated by the issue of fiat money. The government's patience and the extent of its involvement in the economy are key determinants of whether the transition can be accomplished. Copyright 1995 by American Economic Association.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 85 (1995)
Issue (Month): 1 (March)
Pages: 134-49

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Handle: RePEc:aea:aecrev:v:85:y:1995:i:1:p:134-49
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  1. Michael D. Bordo & Finn E. Kydland, 1992. "The gold standard as a rule," Working Paper 9205, Federal Reserve Bank of Cleveland.
  2. Gordon Tullock, 1957. "Paper Money-A Cycle In Cathay," Economic History Review, Economic History Society, vol. 9(3), pages 393-407, 04.
  3. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Friedman, Milton & Schwartz, Anna J., 1986. "Has government any role in money?," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 37-62, January.
  5. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  6. Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-53, November.
  7. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  8. Croushore, Dean, 1993. "Money in the utility function: Functional equivalence to a shopping-time model," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 175-182.
  9. 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.
  10. P. A. Diamond, 1982. "Money in Search Equilibrium," Working papers 297, Massachusetts Institute of Technology (MIT), Department of Economics.
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  1. Advanced Monetary Theory and Policy (ECON 447)

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