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A Basic Model of Exchange

In: Money, Trust, and Banking

Author

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  • Guido K. Schaefer

    (Vienna University of Economics and Business Administration)

Abstract

To develop an integrated theory of money and banking in an analytically rigorous way, this chapter introduces the basic structure of a formal exchange model capturing essential features of the classical problem of a lack of double coincidence of needs and wants in exchange. The model is a market game between a large number of traders designed to fulfil the requirements for the analysis of an integrated theory of money and banking put forward in the preceding chapter: (i) the model is amenable to the introduction of informational market frictions; (ii) individual deals and partners to a contract can be identified; (iii) the terms of the contract such as quantities and prices are endogenously derived from the economic interactions of traders in the market; (iv) individual agents have no market power in the model. Augmented versions of this model will be used in the following chapters to analyze four different transaction technologies in a common framework: i) barter with intermediate exchange of goods; ii) I.O.U.s as a medium of exchange; iii) money as central bank debt; iv) banks providing transaction services.

Suggested Citation

  • Guido K. Schaefer, 2005. "A Basic Model of Exchange," Palgrave Macmillan Books, in: Money, Trust, and Banking, chapter 5, pages 27-32, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-51326-6_5
    DOI: 10.1057/9780230513266_5
    as

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