On the Coexistence of Money and Higher-Return Assets and its Social Role

Abstract:     
This paper adopts mechanism design to tackle the central issue in monetary theory, namely, the coexistence of money and higher-return assets. I describe an economy with pairwise meetings, where fiat money and risk-free capital compete as means of payment. Whenever fiat money has an essential role, any constrained-efficient allocation is such that capital commands a higher rate of return than fiat money.

Number of Pages in PDF File: 46

Keywords: Cost of inflation, pairwise trades, optimal mechanism

JEL Classification: D82, D83, E40, E50

working papers series