Money and Capital as Competing Media of Exchange in a News Economy
Conventional theory suggests that fiat money will have value in capitalpoor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.
|Date of creation:||Sep 2009|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada|
Web page: http://www.sfu.ca/economics.html
More information through EDIRC
|Order Information:|| Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada|
Web: http://www.sfu.ca/economics/research/publications.html Email:
When requesting a correction, please mention this item's handle: RePEc:sfu:sfudps:dp09-02. 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: (Working Paper Coordinator)
If references are entirely missing, you can add them using this form.