On money as a medium of exchange

TY - JOUR

T1 - On money as a medium of exchange

AU - Kiyotaki, Nobuhiro

AU - Wright, Randall

N1 - Publisher Copyright: ©1989 by The University of Chicago. All rights reserved.

PY - 1989/8

Y1 - 1989/8

N2 - We analyze economies in which individuals specialize in consump-tion and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilib-ria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depend-ing both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the gen-eral medium of exchange. We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, ac-ceptability, and liquidity are discussed.

AB - We analyze economies in which individuals specialize in consump-tion and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilib-ria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depend-ing both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the gen-eral medium of exchange. We find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, ac-ceptability, and liquidity are discussed.

UR - https://www.scopus.com/pages/publications/85015256306

UR - https://www.scopus.com/pages/publications/85015256306#tab=citedBy

U2 - 10.1086/261634

DO - 10.1086/261634

M3 - Article

SN - 0022-3808

VL - 97

SP - 927

EP - 954

JO - Journal of Political Economy

JF - Journal of Political Economy

IS - 4

ER -