Money and capital as competing media of exchange

Ricardo Lagos, Guillaume Rocheteau

    Research output: Contribution to journalArticle

    Abstract

    We construct a model where capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman Rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

    Original languageEnglish (US)
    Pages (from-to)247-258
    Number of pages12
    JournalJournal of Economic Theory
    Volume142
    Issue number1
    DOIs
    StatePublished - Sep 2008

    Keywords

    • Commodity money
    • Fiat money

    ASJC Scopus subject areas

    • Economics and Econometrics

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