On the Purchasing Power of Money in an Exchange Economy

Juliusz Radwanski

MPRA Paper from University Library of Munich, Germany

Abstract: A model is constructed in which completely unbacked fiat money, issued by generic supplier implementing realistically specified monetary policy designed to obey certain sufficient conditions, is endogenously accepted by rational individuals at uniquely determined price level. The model generalizes Lucas (1978) to an economy with frictions and specialization in production, without imposing the cash-in-advance constraint. The uniqueness of equilibrium is the consequence of complete characterization of both the environment, and the equilibrium concept. The results challenge the doctrine that equilibria of monetary economies are inherently indeterminate, and that money can become worthless only due to self-fulfilling expectations. The paper shows that monetary policy canonically features two dimensions, one of which corresponds to nominal interest rate, and the other to continuous helicopter drop of net worth, which in the model takes the form of universal basic income.

Keywords: fiat money; monetary policy; Hahn problem; price level; inflation; sunspots; helicopter drop; universal basic income (search for similar items in EconPapers)
JEL-codes: E10 E31 E41 E51 E52 E58 G12 G21 (search for similar items in EconPapers)
Date: 2020-11-19
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:104244

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