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There Will Be Money

A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this paper, the authors argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, they show that the sheer belief that fiat money may become intrinsically useful, even if only in an almost unreachable state, might be enough to rule out nonmonetary equilibria. In a large region of parameters, agents' beliefs and behavior are completely determined by fundamentals.

Provided by: Centre for Economic Performance Topic: CXO Date Added: Sep 2010 Format: PDF

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