The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Fiat Money

  • Neil Wallace
Reference work entry


Fiat money is an intrinsically useless object that serves as a medium of exchange. One challenge is to construct models that depict the ancient notion that a medium of exchange is beneficial. Another is to construct models in which the medium of exchange has a low rate of return. This article reviews how those challenges have been approached and argues that progress has been achieved by taking seriously some old ideas about the circumstances in which money is helpful and about the desirable properties of money: money is helpful when there are absence-of-double-coincidence difficulties that cannot be easily overcome with credit; and a good money has desirable physical properties – recognizability, portability and divisibility.


Absence of doublecoincidence Arrow–Debreu model Asymmetric information Cash-in-advance models Central banking Commitment Commodity money Cournot quantity game Credit Fiat money Friedman rule Imperfect monitoring Incentive feasibility Incomplete markets Infinite horizons Inside and outside money Large-family models Medium of exchange Money Nash equilibrium Open-market operations Perfect monitoring Pooling equilibria Production functions Quantity theory of money Risk sharing Shapley–Shubik trading posts Walras’s Law 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Aiyagari, S., and S. Williamson. 2000. Money and dynamic credit arrangements with private information. Journal of Economic Theory 91: 248–279.CrossRefGoogle Scholar
  2. Araujo, L. 2004. Social norms and money. Journal of Monetary Economics 51: 241–256.CrossRefGoogle Scholar
  3. Cavalcanti, R., and N. Wallace. 1999. Inside and outside money as alternative media of exchange. Journal of Money, Credit and Banking 31: 443–457.CrossRefGoogle Scholar
  4. Cavalcanti, R., A. Erosa, and T. Temzelides. 1999. Private money and reserve management in a random matching model. Journal of Political Economy 107: 929–945.CrossRefGoogle Scholar
  5. Clower, R.W. 1967. A reconsideration of the microfoundations of monetary theory. Western Economic Journal 6: 1–8.Google Scholar
  6. Freeman, S. 1985. Transaction costs and the optimal quantity of money. Journal of Political Economy 93: 146–157.CrossRefGoogle Scholar
  7. Friedman, M., and A. Schwartz. 1963. A monetary history of the United States. Princeton: Princeton University Press.Google Scholar
  8. Green, E. 1987. Lending and the smoothing of uninsurable income. In Contractual arrangements for intertemporal trade, ed. E. Prescott and N. Wallace. Minneapolis: University of Minnesota Press.Google Scholar
  9. Green, E., and R. Zhou. 1998. A rudimentary random-matching model with divisible money and prices. Journal of Economic Theory 81: 252–271.CrossRefGoogle Scholar
  10. Howitt, P. 2005. Beyond search: Fiat money in organized exchange. International Economic Review 46: 405–429.CrossRefGoogle Scholar
  11. Huggett, M., and S. Krasa. 1996. Money and storage in a differential information economy. Economic Theory 8: 191–210.Google Scholar
  12. Kandori, M. 1992. Social norms and community enforcement. Review of Economic Studies 59: 63–80.CrossRefGoogle Scholar
  13. Kiyotaki, N., and R. Wright. 1989. On money as a medium of exchange. Journal of Political Economy 97: 927–954.CrossRefGoogle Scholar
  14. Kocherlakota, N. 1998. Money is memory. Journal of Economic Theory 81: 232–251.CrossRefGoogle Scholar
  15. Kocherlakota, N. 2002. The two-money theorem. International Economic Review 43: 333–346.CrossRefGoogle Scholar
  16. Kocherlakota, N., and N. Wallace. 1998. Optimal allocations with incomplete record-keeping and no-commitment. Journal of Economic Theory 81: 272–289.CrossRefGoogle Scholar
  17. Krishna, R.V. 2005. Non-robustness of the cash-in-advance equilibrium in the trading-post model. Economics Bulletin 5: 1–5.Google Scholar
  18. Lagos, R., and R. Wright. 2005. A unified framework for monetary theory and policy analysis. Journal of Political Economy 113: 463–484.CrossRefGoogle Scholar
  19. Lee, M., and N. Wallace. 2006. Optimal divisibility of money when money is costly to produce. Review of Economic Dynamics 9: 541–556.CrossRefGoogle Scholar
  20. Lee, M., N. Wallace, and T. Zhu. 2005. Modeling denomination structures. Econometrica 73: 949–960.CrossRefGoogle Scholar
  21. Levine, D. 1990. Asset trading mechanisms and expansionary policy. Journal of Economic Theory 54: 148–164.CrossRefGoogle Scholar
  22. Magill, M. and Quinzii, M. 2006. Theory of incomplete markets, Volume I. Cambridge, MA: MIT Press.Google Scholar
  23. Molico, M. 2006. The distribution of money and prices in search equilibrium. International Economic Review 47: 701–722.CrossRefGoogle Scholar
  24. Monroe, A. 1966. Monetary theory before Adam Smith. New York: Kelley.Google Scholar
  25. Ostroy, J. 1973. The informational efficiency of monetary exchange. American Economic Review 63: 597–610.Google Scholar
  26. Patinkin, D. 1951. The invalidity of classical monetary theory. Econometrica 19: 134–151.CrossRefGoogle Scholar
  27. Redish, A. 2000. Bimetallism: An economic and historical analysis. Cambridge: Cambridge University Press.Google Scholar
  28. Renero, J. 1999. Does and should a commodity medium of exchange have relatively low storage costs? International Economic Review 40: 251–264.CrossRefGoogle Scholar
  29. Samuelson, P. 1961. Foundations of economic analysis. Cambridge: Harvard University Press.Google Scholar
  30. Samuelson, P. 1968. What classical and neoclassical monetary theory really was. Canadian Journal of Economics 1: 1–15.CrossRefGoogle Scholar
  31. Sargent, T., and F. Velde. 2002. The big problem of small change. Princeton: Princeton University Press.CrossRefGoogle Scholar
  32. Sargent, T., and N. Wallace. 1983. A model of commodity money. Journal of Monetary Economics 12: 163–187.CrossRefGoogle Scholar
  33. Shi, S. 1995. Money and prices: A model of search and bargaining. Journal of Economic Theory 67: 467–498.CrossRefGoogle Scholar
  34. Shi, S. 1997. A divisible search model of money. Econometrica 65: 75–102.CrossRefGoogle Scholar
  35. Shubik, M. 1973. Commodity money, oligopoly, credit and bankruptcy in a general equilibrium model. Western Economic Journal 11: 24–38.Google Scholar
  36. Smith, B. 2002. Taking intermediation seriously. Journal of Money, Credit and Banking 35: 1319–1358.CrossRefGoogle Scholar
  37. Starr, R., and M. Stinchcombe. 1999. Exchange in a network of trading posts. In Markets, information and uncertainty: Essays in economic theory in honor of Kenneth J. Arrow, ed. G.Chichilnisky. Cambridge: Cambridge University Press.Google Scholar
  38. Townsend, R. 1989. Currency and credit in a private information economy. Journal of Political Economy 97: 1323–1344.CrossRefGoogle Scholar
  39. Trejos, A., and R. Wright. 1995. Search, bargaining, money and prices. Journal of Political Economy 103: 118–141.CrossRefGoogle Scholar
  40. Wallace, N., and T. Zhu. 2007. Float on a note. Journal of Monetary Economics 54: 229–246.CrossRefGoogle Scholar
  41. Williamson, S., and R. Wright. 1994. Barter and monetary exchange under private information. American Economic Review 84: 104–123.Google Scholar
  42. Zhu, T. 2003. Existence of a monetary steady state in a matching model: Indivisible money. Journal of Economic Theory 112: 307–324.CrossRefGoogle Scholar
  43. Zhu, T. 2005. Existence of a monetary steady state in a matching model: Divisible money. Journal of Economic Theory 123: 135–160.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Neil Wallace
    • 1
  1. 1.