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Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples


  • Ross M. Starr


The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of an economic general equilibrium. Monetary structure can be derived from price theory in a modified Arrow-Debreu model. Two constructs are added: transaction costs and market segmentation in trading posts (with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • Ross M. Starr, 2003. "Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 455-474, March.
  • Handle: RePEc:spr:joecth:v:21:y:2003:i:2:p:455-474
    DOI: 10.1007/s00199-002-0326-3

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    Cited by:

    1. Starr, Ross M., 2008. "Commodity money equilibrium in a convex trading post economy with transaction costs," Journal of Mathematical Economics, Elsevier, vol. 44(12), pages 1413-1427, December.
    2. Asjad Naqvi, 2015. "Modeling Growth, Distribution, and the Environment in a Stock-Flow Consistent Framework. WWWforEurope Policy Paper No. 18," WIFO Studies, WIFO, number 57883, December.
    3. Michael B. Devereux & Shouyong Shi, 2013. "Vehicle Currency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 97-133, February.
    4. Naqvi, Syed Ali Asjad, 2015. "Modeling Growth, Distribution, and the Environment in a Stock-Flow Consistent Framework," Ecological Economic Papers 2, WU Vienna University of Economics and Business.
    5. Zeira, Joseph, 2005. "Money and the Size of Transactions," CEPR Discussion Papers 5010, C.E.P.R. Discussion Papers.
    6. Dror Goldberg, 2012. "The tax-foundation theory of fiat money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 489-497, June.
    7. Alexander W. Salter & William J. Luther, 2014. "Synthesizing State and Spontaneous Order Theories of Money," Advances in Austrian Economics, in: Steven Horwitz & Roger Koppl (ed.),Entangled Political Economy, volume 18, pages 161-178, Emerald Publishing Ltd.
    8. Rajeev, Meenakshi, 2012. "Search cost, trading strategies and optimal market structure," Economic Modelling, Elsevier, vol. 29(5), pages 1757-1765.
    9. Ross M. Starr, 2012. "Why is there Money?," Books, Edward Elgar Publishing, number 13763, July.

    More about this item


    Keywords and Phrases: Commodity money; Fiat money; Transaction cost; Scale economy; Double coincidence of wants.; JEL Classification Numbers: E40; D50.;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General


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