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Fiat money as a public signal, medium of exchange, and punishment

journal contribution
posted on 01.01.2020, 00:00 authored by P Gomis-Porqueras, Ching-Jen SunChing-Jen Sun
This paper studies different welfare-enhancing roles that fiat money can have. To do so, we consider an indivisible monetary framework where agents are randomly and bilaterally matched, while the government has weak enforcement powers. Within this environment, we analyze state contingent monetary policies and characterize the resulting equilibria under different government record-keeping technologies. We show that a threat of injecting fiat money, conditional on private actions, can improve allocations and achieve efficiency. This type of state contingent policy is effective even when the government cannot observe any private trades and agents can only communicate with the government through cheap talk. In all these equilibria fiat money and self-enforcing credit are complements in the off equilibrium. Finally, this type of equilibria can also emerge even when the injection of fiat money is not a public signal.

History

Journal

B.E. journal of theoretical economics

Volume

20

Issue

2

Article number

20190098

Pagination

1 - 11

Publisher

De Gruyter

Location

Berlin, Germany

eISSN

1935-1704

Language

eng

Publication classification

C1 Refereed article in a scholarly journal; C Journal article