Adaptive Learning and the Transition to Fiat Money

Abstract:     
This article explores some implications of adaptive learning for monetary evolution using a search-theoretic framework that allows for media-of-exchange network effects. Adaptive learning precludes any voluntary transition to a fiat standard from a non-monetary state of nature and can account for the historically-observed tendency for fiat monetary standards to emerge only following the prior appearance of commodity money and the widespread employment of redeemable banknotes. Adaptive learning can also account for governments' frequent resort to coercive measures to force a switch to fiat money and for their ability to affect such a switch even when doing so is not Pareto optimal.

Number of Pages in PDF File: 19

Accepted Paper Series