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Money versus memory

Listed author(s):
  • Araújo, Luís
  • Camargo, Bráz Ministério de

A well–established fact in monetary theory is that a key ingredient for the essentiality of money is its role as a form of memory. In this paper we study a notion of memory that includes information about an agent’s past actions and trading opportunities but, in contrast to Kocherlakota (1998), does not include information about the past actions and trading opportunities of an agent’s past partners. We first show that the first–best can be achieved with memory even if it only includes information about an agent’s very recent past. Thus, money can fail to be essential even if memory is minimal. We then establish, more interestingly, that if information about trading opportunities is not part of an agent’s record, then money can be better than memory. This shows that the societal benefit of money lies not only on being a record of past actions, but also on being a record of past trading opportunities, a fact that has been overlooked by the monetary literature.

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Paper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number 224.

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Date of creation: 25 Jun 2010
Handle: RePEc:fgv:eesptd:224
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