Money and capital as competing media of exchange

Ricardo Lagos () and Guillaume Rocheteau ()

No 608, Working Paper from Federal Reserve Bank of Cleveland

Abstract: We construct a model in which 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.

Keywords: Money (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-mon
Date: 2006
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Related works:
Working Paper: Money and capital as competing media of exchange (2004)
Journal Article: Money and capital as competing media of exchange (2008)
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