Indivisible goods and fiat money

Jorge Rivera and Michael Florig

Working Papers from University of Chile, Department of Economics

Abstract: Although fiat money is useless in standard Arrow-Debreu models, in this paper we will show that this general conclusion does not hold true when goods are indivisible. In our setting, fiat money is valuable because it facilitates exchange, its price will always be positive and equilibrium allocations will change with the distribution of fiat money even though it does not directly yield utility through consumer preferences. Since a Walrasian equilibrium does not necessarily exist when goods are indivisible, a new equilibrium concept - called a rationing equilibrium - is introduced and its existence is proven under weak assumptions on the economy. A rationing equilibrium is a Walrasian equilibrium for all generic fiat money distributions.

Keywords: competitive equilibrium; indivisible goods; fiat money. (search for similar items in EconPapers)
JEL-codes: C62 D51 E41 (search for similar items in EconPapers)
Date: 2005-01
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Working Paper: Indivisible Goods and Fiat Money (2004)
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