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Patterns of Exchange, Fiat Money, and Coordination

Patterns of Exchange, Fiat Money, and Coordination Many argue that the intrinsic uselessness of fiat money makes ``coordination'' an essential part of monetary theory: consumers could all equally well coordinate on believing that fiat money has no value. The coordination view suggests, however, that many transactions patterns are in fact possible as economic outcomes. Indeed, we do seem to observe different patterns of exchange at different times and in different places, and the relative importance of money is probably not a universal constant. The main goal of this paper is to develop a simple model of money's role as a medium of exchange when multiple transaction patterns are possible. The coordination view is conveniently analyzed in a dynamic version of Shubik's game-theoretic trading post economy. This economy allows a role for fiat money, and fiat money can coexist with barter in exchange. There are multiple decentralized equilibria, and one of these coincides with the equilibrium of a cash-in-advance economy: the model can be viewed as a generalization of the cash-in-advance framework. Other equilibria use both money and other, intrinsically valuable, objects as media of exchange. One implication of the coordination view is that the effects of monetary policy in general depend on the equilibrium transactions pattern. The paper illustrates this point by showing how estimates of the welfare costs of inflation may be biased depending on the econometrician's beliefs about the transactions patterns. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Macroeconomics de Gruyter

Patterns of Exchange, Fiat Money, and Coordination

Alonso, Irasema
The B.E. Journal of Macroeconomics , Volume 1 (2): 1 – Nov 29, 2001
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Publisher
de Gruyter
Copyright
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
ISSN
1935-1690
eISSN
1935-1690
DOI
10.2202/1534-6013.1026
Publisher site
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Abstract

Many argue that the intrinsic uselessness of fiat money makes ``coordination'' an essential part of monetary theory: consumers could all equally well coordinate on believing that fiat money has no value. The coordination view suggests, however, that many transactions patterns are in fact possible as economic outcomes. Indeed, we do seem to observe different patterns of exchange at different times and in different places, and the relative importance of money is probably not a universal constant. The main goal of this paper is to develop a simple model of money's role as a medium of exchange when multiple transaction patterns are possible. The coordination view is conveniently analyzed in a dynamic version of Shubik's game-theoretic trading post economy. This economy allows a role for fiat money, and fiat money can coexist with barter in exchange. There are multiple decentralized equilibria, and one of these coincides with the equilibrium of a cash-in-advance economy: the model can be viewed as a generalization of the cash-in-advance framework. Other equilibria use both money and other, intrinsically valuable, objects as media of exchange. One implication of the coordination view is that the effects of monetary policy in general depend on the equilibrium transactions pattern. The paper illustrates this point by showing how estimates of the welfare costs of inflation may be biased depending on the econometrician's beliefs about the transactions patterns.

Journal

The B.E. Journal of Macroeconomics – de Gruyter

Published: Nov 29, 2001

Keywords: Trading post; fiat money; barter; welfare costs of inflation

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