Government transaction policy, the medium of exchange, and welfare

S. Rao Aiyagari and Neil Wallace

No 516, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: An interpretation of government policy regarding what it accepts in transactions is embedded in a version of the Kiyotaki-Wright model of media of exchange. In an example with two goods and one fiat money, the policies consistent with fiat money being the unique medium of exchange are identified. These uniqueness policies have the government favoring fiat money in its transactions. Benefits and costs accompany any such policy. The benefit is that a worse nonmonetary equilibrium is eliminated; the cost is that a better monetary equilibrium is also eliminated.

Keywords: Welfare (search for similar items in EconPapers)
Date: 1995
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Published in Journal of Economic Theory (Vol. 74, No. 1, May 1997, pp. 1-18)

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Journal Article: Government Transaction Policy, the Medium of Exchange, and Welfare (1997)
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