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A Walrasian Theory of Money and Barter

Author

Listed:
  • Abhijit V. Banerjee
  • Eric S. Maskin

Abstract

We study a barter economy in which each good is produced in two qualities and no trader can distinguish between the qualities of those goods he neither consumes nor produces. We show that in competitive equilibrium there exists a (unique) good—the one for which the discrepancy between qualities is smallest—that serves as the medium of exchange: this good mediates every trade. Equilibrium is inefficient because production of the medium would be lower if it were not for its mediating role. Introducing fiat money enhances welfare by eliminating this distortion. However, high inflation drives traders back to the commodity medium.

Suggested Citation

  • Abhijit V. Banerjee & Eric S. Maskin, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 955-1005.
    • Handle: RePEc:oup:qjecon:v:111:y:1996:i:4:p:955-1005.
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