Existence of Uniqueness of "Money" in General Equilibrium: Natural Monopoly in the Most Liquid Asset

Ross M. Starr

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

Abstract: The monetary character of trade, use of a common medium of exchange, is shown to be an outcome of economic general equilibrium in the presence of 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 trasaction cost) asset. Scale economies in transaction cost account for uniqueness of the (fiat or commodity) money in equilibrium, creating a natural monopoly. Trading posts using a medium of exchange create a network externality inducing others' adoption of the same medium. Bertrand monetary equilibria (among competing trading posts) and uniqueness of 'money' are robust to threats of entry. Government-issued fiat money has a positive equilibrium value from its acceptability for tax payments and sustains its natural monopoly through the scale of government economic activity.

Keywords: commodity money; fiat money; transaction cost; scale economy; couble coincidence of wants (search for similar items in EconPapers)
Date: 2002-11-21
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