Why is there money? Endogenous derivation of `money' as the most liquid asset: a class of examples

Ross M. Starr

Economic Theory, 2003, vol. 21, issue 2, 455-474

Abstract: The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of an economic general equilibrium. Monetary structure can be derived from price theory in a modified Arrow-Debreu model. Two constructs are added: transaction costs and market segmentation in trading posts (with a separate budget constraint at each transaction). Commodity money arises endogenously as the most liquid (lowest transaction cost) asset. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium. Copyright Springer-Verlag Berlin Heidelberg 2003

Keywords: Keywords and Phrases: Commodity money; Fiat money; Transaction cost; Scale economy; Double coincidence of wants.; JEL Classification Numbers: E40; D50. (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (30)

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DOI: 10.1007/s00199-002-0326-3

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