There Will Be Money

Luis Araujo () and Bernardo Guimaraes

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this article we argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, we show that the sheer belief that fiat money may become intrinsically useful, even if only in an almost unreachable state, might be enough to rule out nonmonetary equilibria. In a large region of parameters, agents' beliefs and behavior are completely determined by fundamentals.

Keywords: Fiat money; autarky; equilibrium selection (search for similar items in EconPapers)
JEL-codes: D83 E40 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-hpe and nep-mac
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Working Paper: There will be money (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp1004

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