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Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence

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Abstract

We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, 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 and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.

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  • Juergen Huber & Martin Shubik & Shyam Sunder, 2014. "Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence," Cowles Foundation Discussion Papers 1675RR, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1675rr
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    12. Martin Angerer & Juergen Huber & Martin Shubik & Shyam Sunder, 2010. "An economy with personal currency: theory and experimental evidence," Annals of Finance, Springer, vol. 6(4), pages 475-509, October.
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    Cited by:

    1. Bigoni, Maria & Camera, Gabriele & Casari, Marco, 2020. "Money is more than memory," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 99-115.
    2. Gersbach, Hans & Zelzner, Sebastian, 2022. "Why Bank Money Creation?," CEPR Discussion Papers 17753, C.E.P.R. Discussion Papers.
    3. Martin Shubik, 2016. "Three Essays on the Theory of Money and Financial Institutions Essay 2: The Exchange Economy, Money, and Markets," Cowles Foundation Discussion Papers 2055, Cowles Foundation for Research in Economics, Yale University.
    4. Gabriele Camera & Dror Goldberg & Avi WeissBar-Ilan, 2020. "Endogenous Market Formation and Monetary Trade: An Experiment," Journal of the European Economic Association, European Economic Association, vol. 18(3), pages 1553-1588.
    5. Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2016. "Default penalty as a selection mechanism among multiple equilibria," Journal of Behavioral and Experimental Finance, Elsevier, vol. 9(C), pages 20-38.
    6. Salomon Faure & Hans Gersbach, 2022. "Loanable funds versus money creation in banking: a benchmark result," Journal of Economics, Springer, vol. 135(2), pages 107-149, March.
    7. Salomon Faure & Hans Gersbach, 2021. "On the money creation approach to banking," Annals of Finance, Springer, vol. 17(3), pages 265-318, September.
    8. Maria Bigoni & Gabriele Camera & Marco Casari, 2019. "Cooperation among strangers with and without a monetary system," Working Papers 19-01, Chapman University, Economic Science Institute.
    9. Martin Shubik, 2016. "Three Lectures on the Theory of Money and Financial Institutions: Lecture 1: A Nontechnical Overview," Cowles Foundation Discussion Papers 2036, Cowles Foundation for Research in Economics, Yale University.
    10. Faure, Salomon & Gersbach, Hans, 2016. "Money creation and destruction," CFS Working Paper Series 555, Center for Financial Studies (CFS).
    11. Gabriele Camera, 2024. "Introducing New Forms of Digital Money: Evidence from the Laboratory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(1), pages 153-184, February.
    12. Martin Shubik, 2016. "Three Essays on the Theory of Money and Financial Institutions: Essay 1: A Nontechnical Overview," Cowles Foundation Discussion Papers 2036R, Cowles Foundation for Research in Economics, Yale University.
    13. Karim Jamal & Michael Maier & Shyam Sunder, 2012. "Decoupling Markets and Individuals: Rational Expectations Equilibrium Outcomes from Information Dissemination among Boundedly-Rational Traders," Cowles Foundation Discussion Papers 1868, Cowles Foundation for Research in Economics, Yale University.

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    More about this item

    Keywords

    Experimental gaming; Bank; Fiat money; Outside bank; General equilibrium;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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