Fiat Money and Coordination: A "Perverse" Coexistence of Private Notes and Fiat Money
This paper attempts to combine important insights on matching models of money with insights from the macroeconomic coordination game-technological complementarity literature. One important old insight, but which has been refined lately, is that money is imperfect information. Further, one simple specification of incomplete information in particular, which has proven fruitful in motivating outside fiat money in matching environments, is to assume that agents are unidentifiable. This paper adopts this approach. In earlier work, it has also been argued that outside money has a direct role to play in production coordination itself. On the other hand, this paper considers another, and very different, possible aspect of the relationship between outside money and production coordination, in a matching model of incomplete information. Outside fiat money can actually have its very demand induced by the anticipation and realization of a production coordination failure that, in self-fulfilling fashion, its own existence facilitates. Moreover, this perverse demand for outside fiat money coexists with private notes.
Volume (Year): 31 (2005)
Issue (Month): 3 (Summer)
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- Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
- Russell Cooper & Dean Corbae, 2001. "Financial collapse and active monetary policy: a lesson from the Great Depression," Staff Report 289, Federal Reserve Bank of Minneapolis.
- Bryant, John, 2002. "Trade, credit and systemic fragility," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 475-489, March.
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