Fiat Money’s Essentiality: A Result of Social Cooperation in a Competitive Economy

Abstract:     
This paper mainly addresses why people are rationally willing to cooperate with one another to accept fiat money from the perspective of decentralized sequential general equilibrium framework by using dynamic game to determine agents’ expectation of nominal prices in unrevealed future. The model formulates the process that agents determine fiat money’s purchasing power competitively in an infinite-time decentralized sequence economy where agents use fiat money to bridge markets to avoid the huge transaction cost. It is proved that all agents’ expectation with fiat money’s unchanged nominal value is self-fulfilling with a Nash Equilibrium so as to guarantee fiat money’s essentiality.

Number of Pages in PDF File: 43

Keywords: fiat money’s essentiality, social cooperation, competitive economy

JEL Classification: C72, D51, E40

working papers series