A Model of Fiat Money and Barter
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NBER Working Paper No. 4919
Issued in November 1994
NBER Program(s): ME
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.
Published: Journal of Economic Theory, vol. 68, no. 1, pp. 111-132, January 1996.
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