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The Value of Fiat Money with an Outside Bank: An Experimental Game

Juergen Huber, Martin Shubik and Shyam Sunder ()
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Juergen Huber: University of Innsbruck

No 1675, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Why people accept intrinsically worthless fiat money in exchange for real goods and services has been a longstanding question. There are many competing sufficient explanations that may confound each other in practice but can be individually tested in isolation experimentally. In this paper we examine a sufficient explanation of the value of fiat money through the existence of a debt instrument which allows consumption to be moved earlier in time. We present experimental evidence that the theoretical predictions about the behavior of such economies work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money, although many other institutions such as taxation provide alternatives.

Keywords: Experimental Gaming; Bank; Fiat money (search for similar items in EconPapers)
JEL-codes: C73 C91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba
Date: 2008-09, Revised 2010-04
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