The Tax-Foundation Theory of Fiat Money
A government can promote the use of an object as the general medium of exchange by accepting it in tax payments. I prove this old claim in a dynamic model and compare the mechanism to convertibility. The government can often keep its favourite money in circulation even while increasing its quantity and thus causing it to decrease in value. This opens the door for an inflationary policy. Most successful fiat moneys have been acceptable for tax payments, typically due to legal tender laws. Numerous historical failures of fiat moneys are consistent with the theory.
|Date of creation:||Apr 2009|
|Contact details of provider:|| Postal: Faculty of Social Sciences, Bar Ilan University 52900 Ramat-Gan|
Phone: Phone: +972-3-5318345
Web page: http://www.biu.ac.il/soc/ec
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ricardo Lagos & Randall Wright, 2002.
"A unified framework for monetary theory and policy analysis,"
0211, Federal Reserve Bank of Cleveland.
- Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
- Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
- George Selgin, 2003. "Adaptive Learning and the Transition to Fiat Money," Economic Journal, Royal Economic Society, vol. 113(484), pages 147-165, January.
- Starr, Ross M, 1974. "The Price of Money in a Pure Exchange Monetary Economy with Taxation," Econometrica, Econometric Society, vol. 42(1), pages 45-54, January.
- S. Rao Aiyagari & Neil Wallace, 1995.
"Government transaction policy, the medium of exchange, and welfare,"
516, Federal Reserve Bank of Minneapolis.
- Aiyagari, S. Rao & Wallace, Neil, 1997. "Government Transaction Policy, the Medium of Exchange, and Welfare," Journal of Economic Theory, Elsevier, vol. 74(1), pages 1-18, May.
- Goodhart, Charles A. E., 1998. "The two concepts of money: implications for the analysis of optimal currency areas," European Journal of Political Economy, Elsevier, vol. 14(3), pages 407-432, August.
- Goldberg, Dror, 2009. "The Massachusetts Paper Money of 1690," The Journal of Economic History, Cambridge University Press, vol. 69(04), pages 1092-1106, December.
- Pradeep Dubey & John Geanakoplos, 2003. "Inside and outside fiat money, gains to trade, and IS-LM," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 347-397, 03.
- 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, 03.
- Camera, G. & Noussair, C. & Tucker, S., 2000.
"Rate-of-Return Dominance and Efficiency in an Experimental Economy,"
Purdue University Economics Working Papers
1135, Purdue University, Department of Economics.
- Gabriele Camera & Charles Noussair & Steven Tucker, 2003. "Rate-of-return dominance and efficiency in an experimental economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(3), pages 629-660, October.
- Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639, December.
- Charalambos D Aliprantis & Gabriele Camera & Daniela Puzzello, 2007. "Contagion Equilibria in a Monetary Model," Econometrica, Econometric Society, vol. 75(1), pages 277-282, 01.
- Shouyong Shi, 2005. "Nominal Bonds And Interest Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 579-612, 05.
- Stephen Williamson, 2004. "Limited participation, private money, and credit in a spatial model of money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(4), pages 857-875, November.
- Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
- Lotz, Sebastien & Rocheteau, Guillaume, 2002. "On the Launching of a New Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 563-588, August.
- Smith, Bruce D, 1985. "Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1178-1211, December.
- Klein, Benjamin, 1974. "The Competitive Supply of Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(4), pages 423-453, November.
When requesting a correction, please mention this item's handle: RePEc:biu:wpaper:2009-5. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics)
If references are entirely missing, you can add them using this form.