Fiat Money and Quality Uncertainty
This paper studies the role of money as a medium of exchange when barter trade is restricted not only by the double-coincidence-of-wants requirement but also by private information about the quality of commodities. For this purpose, the model of N. Kiyotaki and R. Wright (1989) is extended to include commodities of both high and low quality. It is shown that, despite being intrinsically useless, fiat money may have value in trade because it is of uniform quality. Moreover, the introduction of a sufficiently small amount of fiat money proves to be welfare increasing. Copyright 1997 by The London School of Economics and Political Science
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Volume (Year): 64 (1997)
Issue (Month): 256 (November)
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