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Government Transaction Policy, the Medium of Exchange, and Welfare

  • Aiyagari, S. Rao
  • Wallace, Neil

An interpretation of government policy regarding what it accepts in transactions is embedded in a version of the Kiyotaki-Wright model of media of exchange. In an example with two goods and one fiat money, the policies consistent with fiat money being the unique medium of exchange are identified. These uniqueness policies have the government favoring fiat money in its transactions. Benefits and costs accompany any such policy. The benefit is that a worse nonmonetary equilibrium is eliminated; the cost is that a better monetary equilibrium is also eliminated.

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File URL: http://www.sciencedirect.com/science/article/B6WJ3-45S9389-2F/2/56cf644d90fbceef8c1aab2982300ae9
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 74 (1997)
Issue (Month): 1 (May)
Pages: 1-18

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Handle: RePEc:eee:jetheo:v:74:y:1997:i:1:p:1-18
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Aiyagari, S Rao & Wallace, Neil, 1992. "Fiat Money in the Kiyotaki-Wright Model," Economic Theory, Springer, vol. 2(4), pages 447-64, October.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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