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A Model of Fiat Money and Barter

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  • Hayashi, Fumio
  • Matsui, Akihiko

Abstract

We present an infinite horizon model with capital in which fiat money and barter are two competing means of payment. Fiat money has value because barter is limited by the extent of a double coincidence of wants. The pattern of exchange generally involves both money and barter. We find that the Chicago rule is sufficient for Pareto efficiency, while nominal interest smoothing is necessary. For a specific utility function we provide a complete characterization of the patterns of exchange and calculate the range of inflation rates over which a stationary monetary equilibrium exists.
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Suggested Citation

  • Hayashi, Fumio & Matsui, Akihiko, 1996. "A Model of Fiat Money and Barter," Journal of Economic Theory, Elsevier, vol. 68(1), pages 111-132, January.
  • Handle: RePEc:eee:jetheo:v:68:y:1996:i:1:p:111-132
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    References listed on IDEAS

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    1. Engineer, Merwan & Bernhardt, Dan, 1991. "Money, Barter, and the Optimality of Legal Restrictions," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 743-773, August.
    2. Jean-Michel Grandmont & Yves Younes, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Oxford University Press, vol. 39(3), pages 355-372.
    3. Jean-Michel Grandmont & Yves Younes, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Oxford University Press, vol. 40(2), pages 149-165.
    4. Chatterjee, S. & Corbae, D., 1991. "Endogenous Market Participation and General Equilibrium Value of Money," Working Papers 91-08, University of Iowa, Department of Economics.
    5. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
    6. Shapley, Lloyd S. & Shubik, Martin, 1969. "On market games," Journal of Economic Theory, Elsevier, vol. 1(1), pages 9-25, June.
    7. Oh, Seonghwan, 1989. "A theory of a generally acceptable medium of exchange and barter," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 101-119, January.
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    Cited by:

    1. repec:ebl:ecbull:v:18:y:2002:i:1:p:1-11 is not listed on IDEAS
    2. Randall Wright, 2005. "Introduction To "Models Of Monetary Economies Ii: The Next Generation"," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 305-316, May.
    3. repec:ebl:ecbull:v:5:y:2005:i:3:p:1-5 is not listed on IDEAS
    4. R. Vijay Krishna, 2004. "Non-robustness of the Cash-in-advance Equilibrium in the Trading Post Model," Levine's Bibliography 122247000000000104, UCLA Department of Economics.
    5. Deck, Cary A. & McCabe, Kevin A. & Porter, David P., 2006. "Why stable fiat money hyperinflates: Results from an experimental economy," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 471-486, November.
    6. Sophie Brana & Mathilde Maurel, 1999. "Barter in Russia: Liquidity Shortage versus Lack of Restructuring," William Davidson Institute Working Papers Series 271, William Davidson Institute at the University of Michigan.
    7. Marvasti, A. & Smyth, David J., 1999. "The effect of barter on the demand for money: an empirical analysis," Economics Letters, Elsevier, vol. 64(1), pages 73-80, July.
    8. Matsui, Akihiko, 1998. "Strong Currency and Weak Currency," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 305-333, December.
    9. George Selgin, 2003. "Adaptive Learning and the Transition to Fiat Money," Economic Journal, Royal Economic Society, vol. 113(484), pages 147-165, January.
    10. Edward J. Green, 2002. "Payment Arrangements and Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 51-57, May.
    11. Araujo, Luis & Camargo, Braz & Minetti, Raoul & Puzzello, Daniela, 2012. "The essentiality of money in environments with centralized trade," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 612-621.
    12. Krishna, R. Vijay, 2003. "Non-robustness of the Cash-in-Advance Equilibrium in the Trading-Post Model," Working Papers 9-03-2, Pennsylvania State University, Department of Economics.
    13. Jean-Paul Chavas & Daniel W. Bromley, 2008. "On the Origins and Evolving Role of Money," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 624-651, December.
    14. Samuel E. Vazquez, 2009. "Scale Invariance, Bounded Rationality and Non-Equilibrium Economics," Papers 0902.3840, arXiv.org.

    More about this item

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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