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Monetary Equilibrium with Decentralized Trade and Learning

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Abstract

This paper analyzes the stability of monetary regimes in an economy where fiat money is endogenously created by the government, information about its value is imperfect, and learning is decentralized. We show that monetary stability depends crucially on the speed of information transmission in the economy. Our model generates a dynamic on the acceptability of fiat money that resembles historical accounts of the rise and eventual collapse of overissued paper money. It also provides an explanation of the fact that, despite its obvious advantages, the widespread use of fiat money is only a recent development.

Suggested Citation

  • Luis Araujo & Braz Camargo, 2005. "Monetary Equilibrium with Decentralized Trade and Learning," University of Western Ontario, Departmental Research Report Series 20051, University of Western Ontario, Department of Economics.
    • Handle: RePEc:uwo:uwowop:20051
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    1. Wallace, Neil, 1997. "Short-Run and Long-Run Effects of Changes in Money in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1293-1307, December.
    2. Araujo, Luis & Shevchenko, Andrei, 2006. "Price dispersion, information and learning," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1197-1223, September.
    3. King, Robert G., 1983. "On the economics of private money," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 127-158.
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    6. Katzman, Brett & Kennan, John & Wallace, Neil, 2003. "Output and price level effects of monetary uncertainty in a matching model," Journal of Economic Theory, Elsevier, vol. 108(2), pages 217-255, February.
    7. Dutta, Prajit K. & Majumdar, Mukul K. & Sundaram, Rangarajan K., 1994. "Parametric continuity in dynamic programming problems," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1069-1092, November.
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    9. Milton Friedman & Anna J. Schwartz, 1987. "Has Government Any Role in Money?," NBER Chapters, in: Money in Historical Perspective, pages 289-314, National Bureau of Economic Research, Inc.
    10. Andrei Shevchenko & Luis Araujo, 2004. "Prices, Information and Learning," 2004 Meeting Papers 118, Society for Economic Dynamics.
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    Cited by:

    1. Araujo, Luis, 2004. "Social norms and money," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 241-256, March.
    2. Martin, Antoine & Schreft, Stacey L., 2006. "Currency competition: A partial vindication of Hayek," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2085-2111, November.
    3. Elena Pastorino, 2004. "Optimal Job Design and Career Dynamics in the Presence of Uncertainty," Econometric Society 2004 North American Summer Meetings 292, Econometric Society.

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    More about this item

    Keywords

    monetary stability; endogenous money; decentralized trade; learning;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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