Monetary General Equilibrium with Transaction Costs

Ross M. Starr

University of California at San Diego, Economics Working Paper Series from Department of Economics, UC San Diego

Abstract: Commodity money arises endogenously in a general equilibrium model with convex transaction cost technology and with separate budget constraints for each transaction. Transaction costs imply differing bid and ask (selling and buying) prices. The most liquid good --- with the smallest proportionate bid/ask spread --- becomes commodity money. General equilibrium may not be Pareto efficient, but if zero-transaction-cost money is available then the equilibrium allocation is Pareto efficient. Fiat money is an intrinsically worthless instrument. Its positive price comes from acceptability in paying taxes, and its use as a medium of exchange is based on low transaction cost.

Keywords: commodity money; fiat money; general equilibrium; transaction cost (search for similar items in EconPapers)
Date: 2002-06-28
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Citations: View citations in EconPapers (1)

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