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A Model of Fiat Money and Barter

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  • Fumio Hayashi
  • Akihiko Matsui

Abstract

We present an infinite horizon model with capital in which fiat money and barter are two competing means of payment. Fiat money has value because barter is limited by the extent of a double coincidence of wants. The pattern of exchange generally involves both money and barter. We find that the Chicago rule is sufficient for Pareto efficiency, while nominal interest smoothing is necessary. For a specific utility function we provide a complete characterization of the patterns of exchange and calculate the range of inflation rates over which a stationary monetary equilibrium exists.

Suggested Citation

  • Fumio Hayashi & Akihiko Matsui, 1994. "A Model of Fiat Money and Barter," NBER Working Papers 4919, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4919
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    References listed on IDEAS

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    1. Jean-Michel Grandmont & Yves Younes, 1973. "On the Efficiency of a Monetary Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(2), pages 149-165.
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    5. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152, Elsevier.
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    7. Oh, Seonghwan, 1989. "A theory of a generally acceptable medium of exchange and barter," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 101-119, January.
    8. Engineer, Merwan & Bernhardt, Dan, 1991. "Money, Barter, and the Optimality of Legal Restrictions," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 743-773, August.
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    Cited by:

    1. repec:ebl:ecbull:v:5:y:2005:i:3:p:1-5 is not listed on IDEAS
    2. Edward J. Green, 2002. "Payment Arrangements and Inflation," American Economic Review, American Economic Association, vol. 92(2), pages 51-57, May.
    3. Matsui, Akihiko, 1998. "Strong Currency and Weak Currency," Journal of the Japanese and International Economies, Elsevier, vol. 12(4), pages 305-333, December.
    4. repec:ebl:ecbull:v:18:y:2002:i:1:p:1-11 is not listed on IDEAS
    5. Randall Wright, 2005. "Introduction to \\"Models of Monetary Economies II: The Next Generation\\"," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 29(Oct), pages 2-9.
    6. R. Vijay Krishna, 2004. "Non-robustness of the Cash-in-advance Equilibrium in the Trading Post Model," Levine's Bibliography 122247000000000104, UCLA Department of Economics.
    7. Marvasti, A. & Smyth, David J., 1999. "The effect of barter on the demand for money: an empirical analysis," Economics Letters, Elsevier, vol. 64(1), pages 73-80, July.
    8. Jean-Paul Chavas & Daniel W. Bromley, 2008. "On the Origins and Evolving Role of Money," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 624-651, December.
    9. Brana, S. & Maurel, M., 1999. "Barter in Russia : Liquidity Shortage Versus Lack of Restructuring," Papiers d'Economie Mathématique et Applications 1999.98, Université Panthéon-Sorbonne (Paris 1).
    10. Krishna, R. Vijay, 2003. "Non-robustness of the Cash-in-Advance Equilibrium in the Trading-Post Model," Working Papers 9-03-2, Pennsylvania State University, Department of Economics.
    11. Samuel E. Vazquez, 2009. "Scale Invariance, Bounded Rationality and Non-Equilibrium Economics," Papers 0902.3840, arXiv.org.
    12. Deck, Cary A. & McCabe, Kevin A. & Porter, David P., 2006. "Why stable fiat money hyperinflates: Results from an experimental economy," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 471-486, November.
    13. George Selgin, 2003. "Adaptive Learning and the Transition to Fiat Money," Economic Journal, Royal Economic Society, vol. 113(484), pages 147-165, January.
    14. Araujo, Luis & Camargo, Braz & Minetti, Raoul & Puzzello, Daniela, 2012. "The essentiality of money in environments with centralized trade," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 612-621.

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    More about this item

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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