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Money in a theory of exchange

Listed author(s):
  • Daniel L. Thornton

Major problems in monetary economics are to: introduce money into the economy in a way that explains how money arises endogenously; explain why money is preferred to other methods of exchange; and identify the welfare gains from using money. In this paper, Daniel L. Thornton develops a framework for assessing money's role in the economy and identifies the welfare gains associated with its use. In Thornton's framework, money is welfare enhancing not only because it reduces the resources necessary for exchange-thereby increasing both consumption and leisure-but, money further increases welfare by promoting further trade and greater specialization. ; Thornton then discusses the implications of his analysis for several important issues in monetary theory: the existence of fiat money; the role of money and credit in exchange; the asset demand for money; the buffer-stock notion of money demand; the welfare benefits of money; and the welfare costs of inflation.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2000)
Issue (Month): Jan ()
Pages: 35-60

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Handle: RePEc:fip:fedlrv:y:2000:i:jan:p:35-60:n:v.82no.1
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  1. Easterly, William, 1993. "How much do distortions affect growth?," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 187-212, November.
  2. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  3. Benhabib, Jess & Bull, Clive, 1983. "The Optimal Quantity of Money: A Formal Treatment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 101-111, February.
  4. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
  5. Dornbusch, Rudiger & Frenkel, Jacob A, 1973. "Inflation and Growth: Alternative Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 141-156, Part I Fe.
  6. Mason, Will E, 1976. "The Empirical Definition of Money: A Critique," Economic Inquiry, Western Economic Association International, vol. 14(4), pages 525-538, December.
  7. John Duffy, 1998. "Monetary theory in the laboratory," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 9-26.
  8. James B. Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  9. Greenfield, Robert L & Yeager, Leland B, 1983. "A Laissez-Faire Approach to Monetary Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 302-315, August.
  10. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
  11. Niehans, Jurg, 1971. "Money and Barter in General Equilibrium with Transaction Costs," American Economic Review, American Economic Association, vol. 61(5), pages 773-783, December.
  12. Ritter, Joseph A, 1995. "The Transition from Barter to Fiat Money," American Economic Review, American Economic Association, vol. 85(1), pages 134-149, March.
  13. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
  14. Thornton, Daniel L., 1983. "Money, net wealth, and the real-balance effect," Journal of Macroeconomics, Elsevier, vol. 5(1), pages 105-117.
  15. Jack Hirshleifer, 1973. "Exchange Theory- The Missing Chapter," UCLA Economics Working Papers 035, UCLA Department of Economics.
  16. Barro, Robert J. & Fischer, Stanley, 1976. "Recent developments in monetary theory," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 133-167, April.
  17. White, Lawrence H, 1984. "Competitive Payments Systems and the Unit of Account," American Economic Review, American Economic Association, vol. 74(4), pages 699-712, September.
  18. 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.
  19. Hicks, John, 2017. "A Market Theory of Money," OUP Catalogue, Oxford University Press, number 9780198796237.
  20. 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.
  21. Fischer, Stanley, 1986. "Monetary rules and commodity money schemes under uncertainty," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 21-35, January.
  22. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-775, August.
  23. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
  24. Hess, Alan C, 1971. "An Explanation of Short-Run Fluctuations in the Ratio of Currency to Demand Deposits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 666-679, August.
  25. Brunner, Karl & Meltzer, Allan H, 1971. "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review, American Economic Association, vol. 61(5), pages 784-805, December.
  26. Alchian, Armen A, 1977. "Why Money?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 133-140, February.
  27. Dotsey, Michael, 1988. "The Demand for Currency in the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(1), pages 22-40, February.
  28. Robert E. Lucas, Jr., 1994. "On the welfare cost of inflation," Working Papers in Applied Economic Theory 94-07, Federal Reserve Bank of San Francisco.
  29. Menger, Carl, 1892. "On the Origins of Money," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 2, pages 239-255.
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