The Value of Fiat Money with an Outside Bank: An Experimental Game

Juergen Huber, Martin Shubik and Shyam Sunder ()
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Juergen Huber: University of Innsbruck

No 1675, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding puzzle in economics. Attempts to explain the broad acceptance of fiat money have relied on either assuming that someone will exchange the fiat money for real consumption at the end of the horizon, or on pushing the puzzle of fiat money into infinite future in overlapping generations settings. We examine an alternative route that can explain the value of fiat money through a debt instrument which allows consumption to be moved backward in time. In this paper, we present empirical evidence that the theoretical predictions about the behavior of such economies work reasonably well in a laboratory experiment. The invention of fiat money and related debt instruments allow society to replace expensive commodities by costless paper and cut the dead weight loss associated with the former.

Keywords: Experimental Gaming; Bank; Fiat money (search for similar items in EconPapers)
JEL-codes: C73 C91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba
Date: Written
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Working Paper: The Value of Fiat Money with an Outside Bank: An Experimental Game (2009)
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