Money and Capital as Competing Media of Exchange

18 Pages Posted: 17 Oct 2007

See all articles by Ricardo Lagos

Ricardo Lagos

New York University (NYU) - Department of Economics

Guillaume Rocheteau

Federal Reserve Bank of Cleveland; National University of Singapore (NUS)

Date Written: August 2006

Abstract

We construct a model in which capital competes with fiat money as a medium of exchange, and establish conditions on fundamentals under which fiat money can be both valued and socially beneficial. When the socially efficient stock of capital is too low to provide the liquidity agents need, they overaccumulate productive assets to use as media of exchange. When this is the case, there exists a monetary equilibrium that dominates the nonmonetary one in terms of welfare. Under the Friedman rule, fiat money provides just enough liquidity so that agents choose to accumulate the same capital stock a social planner would.

Keywords: commodity money, fiat money

JEL Classification: E41, E42, E52

Suggested Citation

Lagos, Ricardo and Rocheteau, Guillaume, Money and Capital as Competing Media of Exchange (August 2006). FRB of Cleveland Working Paper No. 06-08. Available at SSRN: https://ssrn.com/abstract=1022334 or http://dx.doi.org/10.2139/ssrn.1022334

Ricardo Lagos

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
212-998-8937 (Phone)

Guillaume Rocheteau (Contact Author)

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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