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On Money as a Medium of Exchange


  • Kiyotaki, Nobuhiro
  • Wright, Randall


The authors analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilibria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depending both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the general medium of exchange. The authors find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, acceptability, and liquidity are discussed. Copyright 1989 by University of Chicago Press.

Suggested Citation

  • Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
  • Handle: RePEc:ucp:jpolec:v:97:y:1989:i:4:p:927-54

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    References listed on IDEAS

    1. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-685, May.
    2. Lucas, Robert E B & Stark, Oded, 1985. "Motivations to Remit: Evidence from Botswana," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 901-918, October.
    3. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-846, July-Aug..
    4. Caldwell, John C & Reddy, P H & Caldwell, Pat, 1986. "Periodic High Risk as a Cause of Fertility Decline in a Changing Rural Environment: Survival Strategies in the 1980-1983 South Indian Drought," Economic Development and Cultural Change, University of Chicago Press, vol. 34(4), pages 677-701, July.
    5. Keeley, Michael C, 1977. "The Economics of Family Formation," Economic Inquiry, Western Economic Association International, vol. 15(2), pages 238-250, April.
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