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Money and capital as competing media of exchange

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  • Ricardo Lagos
  • Guillaume Rocheteau

Abstract

We construct a model where capital competes with fiat money as a medium of exchange, and we establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman Rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

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  • Ricardo Lagos & Guillaume Rocheteau, . "Money and capital as competing media of exchange," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:341
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    References listed on IDEAS

    as
    1. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
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    5. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
    6. Burdett, Kenneth & Trejos, Alberto & Wright, Randall, 2001. "Cigarette Money," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 117-142, July.
    7. Thomas J. Sargent & Neil Wallace, . "A model of commodity money," Staff Report, Federal Reserve Bank of Minneapolis.
    8. Abhijit V. Banerjee & Eric S. Maskin, 1996. "A Walrasian Theory of Money and Barter," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 955-1005.
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    Cited by:

    1. Berentsen, Aleksander & Monnet, Cyril, 2008. "Monetary policy in a channel system," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1067-1080, September.
    2. Shoujian Zhang, 2014. "Technology, Wage Dispersion and Inflation," CDMA Working Paper Series 201403, Centre for Dynamic Macroeconomic Analysis.
    3. Alessandro Marchesiani & Aleksander Berentsen, 2010. "Standing Facilities Versus Open Market Operations: Equivalence Results," 2010 Meeting Papers 929, Society for Economic Dynamics.
    4. Richard Dutu & Ed Nosal & Guillaume Rocheteau, 2005. "On the recognizability of money," Working Papers (Old Series) 0512, Federal Reserve Bank of Cleveland.
    5. Miguel Molico & Yahong Zhang, 2006. "Monetary Policy and the Distribution of Money and Capital," Computing in Economics and Finance 2006 136, Society for Computational Economics.

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    Keywords

    Liquidity (Economics); Capital;

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