BEYOND SEARCH: FIAT MONEY IN ORGANIZED EXCHANGE

Peter Howitt

International Economic Review, 2005, vol. 46, issue 2, 405-429

Abstract: A model of fiat money is constructed in which spatial separation and the logistics of communication are made explicit as in search theory, but exchange is organized by profit-seeking business enterprises as in all market economies. Firms mitigate search costs by opening shops that are easily located. Equilibria may exist in which fiat money is used as a universal medium of exchange. When a monetary equilibrium exists, fiat money is essential. The model provides a foundation to cash-in-advance theory, without specifying in advance that one object will be used as the universal medium of exchange. Copyright 2005 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2005
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