Abstract for:

There Will Be Money

Luis  Araujo,  Bernardo  Guimaraes,  September 2010
Paper No' CEPDP1004: | Full paper

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Keywords: Fiat money; autarky, equilibrium selection

JEL Classification: E40; D83

Is hard copy/paper copy available? YES - Paper Copy Still In Print.

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This Paper is published under the following series: CEP Discussion Papers

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Abstract:

A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this article we argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, we show that the sheer belief that fiat money may become intrinsically useful, even if only in an almost unreachable state, might be enough to rule out nonmonetary equilibria. In a large region of parameters, agents’ beliefs and behavior are completely determined by fundamentals.