A Walrasian Theory of Money and Barter
The authors 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. They 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. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 111 (1996)
Issue (Month): 4 (November)
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