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Indivisible goods and fiat money

  • Jorge Rivera C.
  • Michael Florig

Although fiat money is useless in standard Arrow-Debreu models, in this paper we will show that this general conclusion does not hold true when goods are indivisible. In our setting, fiat money is valuable because it facilitates exchange, its price will always be positive and equilibrium allocations will change with the distribution of fiat money even though it does not directly yield utility through consumer preferences. Since a Walrasian equilibrium does not necessarily exist when goods are indivisible, a new equilibrium concept - called a rationing equilibrium - is introduced and its existence is proven under weak assumptions on the economy. A rationing equilibrium is a Walrasian equilibrium for all generic fiat money distributions.

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Paper provided by University of Chile, Department of Economics in its series Working Papers with number wp212.

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Date of creation: Jan 2005
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Handle: RePEc:udc:wpaper:wp212
Contact details of provider: Web page: http://www.econ.uchile.cl/

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  20. Douglas Gale & Martin Hellwig, 1984. "A General-Equilibrium Model of the Transactions Demand for Money," STICERD - Theoretical Economics Paper Series 100, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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