Why is there Money? Convergence to a Monetary Equilibrium in a General Equilibrium Model with Transaction Costs
This paper presents a class of examples where a nonmonetary economy converges in a tatonnement process to a monetary equilibrium. Exchange takes place in organized markets characterized by an array of trading posts where each pair of goods may be traded for one another. A barter equilibrium with m commodities is characterized by m(m-1)/2 commodity pair trading posts, most of which host active trade. A monetary equilibrium with unique money is characterized by active trade concentrated on m-1 posts, those trading in 'money' versus the m-1 nonmonetary commodities. There are two distinct sources of monetization: absence of double coincidence of wants and scale economies in transaction costs. As households discover that some pairwise markets (those dealing in the 'natural' money or those with high trading volumes) have lower transaction costs, they restructure their trades to take advantage of the low cost. Use of media of exchange arises endogenously from their low transaction cost. Uniqueness of the medium of exchange in equilibrium results from scale economies in the transaction technology.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
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.:
- Clower, Robert W, 1995. "On the Origin of Monetary Exchange," Economic Inquiry, Western Economic Association International, vol. 33(4), pages 525-36, October.
- Ostroy, Joseph M. & Starr, Ross M., 1990.
"The transactions role of money,"
Handbook of Monetary Economics,
in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 1, pages 3-62
- Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
- Ostroy, Joseph M & Starr, Ross M, 1974.
"Money and the Decentralization of Exchange,"
Econometric Society, vol. 42(6), pages 1093-1113, November.
- Joseph M. Ostroy & Ross M. Starr, 1973. "Money and the Decentralization of Exchange," Cowles Foundation Discussion Papers 349, Cowles Foundation for Research in Economics, Yale University.
- Joseph M. Ostroy & Ross M. Starr, 1973. "Money and the Decentralization of Exchange," UCLA Economics Working Papers 041, UCLA Department of Economics.
- Hahn, F H, 1971. "Equilibrium with Transaction Costs," Econometrica, Econometric Society, vol. 39(3), pages 417-39, May.
- David Starrett, 1973. "Inefficiency and the Demand for "Money" in a Sequence Economy," Review of Economic Studies, Oxford University Press, vol. 40(4), pages 437-448.
- Abhijit V. Banerjee & Eric S. Maskin, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 955-1005.
- Foley, Duncan K., 1970. "Economic equilibrium with costly marketing," Journal of Economic Theory, Elsevier, vol. 2(3), pages 276-291, September.
- Li, Yiting & Wright, Randall, 1998. "Government Transaction Policy, Media of Exchange, and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 290-313, August.
- Abhijit V. Banerjee & Eric S. Maskin, 1996. "A Walrasian Theory of Money," Harvard Institute of Economic Research Working Papers 1753, Harvard - Institute of Economic Research.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0058. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.