Summary
Is the use of fiat money essential in any efficient organization of exchange? We investigate this question in economies that are generalizations of the Townsend (1980) turnpike model that include limited commitment and differential information. We show that in the Townsend turnpike model fiat money is not essential unless there is limited commitment. Furthermore, fiat money has no role whenever there is storage with positive returns. In the presence of differential information fiat money is essential in overcoming incentive problems. This is the case even if there is storage with positive returns.
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We wish to thank Bart Taub, Anne Villamil and seminar participants at the University of Chicago, the Federal Reserve Bank of Minneapolis, Ohio State, the 1994 North American Summer Meeting of the Econometric Society, SEDC 1994, and Oberwolfach 1994.
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Huggett, M., Krasa, S. Money and storage in a differential information economy. Econ Theory 8, 191–210 (1996). https://doi.org/10.1007/BF01211813
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DOI: https://doi.org/10.1007/BF01211813