Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence

Abstract

We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.

Keywords: Experimental gaming, Bank, Fiat money, Outside bank, General equilibrium

JEL Classification: C73, C91