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Money and Capital as Competing Media of Exchange in a News Economy

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Abstract

Conventional theory suggests that fiat money will have value in capitalpoor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.

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  • Fernando Martin & David Andolfatto, 2009. "Money and Capital as Competing Media of Exchange in a News Economy," Discussion Papers dp09-02, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp09-02
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    File URL: http://www.sfu.ca/repec-econ/sfu/sfudps/dp09-02.pdf
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Money and Capital as Competing Media of Exchange in a News Economy
      by Christian Zimmermann in NEP-DGE blog on 2010-06-28 16:10:13

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    Cited by:

    1. David Andolfatto & Fernando Martin, 2013. "Information Disclosure and Exchange Media," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 527-539, July.

    More about this item

    Keywords

    fiat money; capital; news shocks;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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    1. Canadian Macro Study Group

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