Why is there Money?

Why is there Money?

Walrasian General Equilibrium Foundations of Monetary Theory

Ross M. Starr

The microeconomic foundation of the theory of money has long represented a puzzle to economic theory. Why is there Money? derives the foundations of monetary theory from advanced price theory in a mathematically precise family of trading post models.

Introduction

Ross M. Starr

Subjects: economics and finance, history of economic thought, money and banking

Extract

: why is there no money? [An] important and difficult question . . . [is] not answered by the approach taken here: the integration of money in the theory of value . . . Gerard Debreu, Theory of Value (1959) A CHALLENGE During the 1970s at Yale’s Cowles Foundation, the most serious scientific conversations took place in the coffee lounge. As a junior colleague then in the company of leading monetary economists James Tobin, William Brainard and Henry Wallich, I remember a discussion of inflation. One colleague said ‘Well, Herb Scarf [a general equilibrium theorist] says . . . .’ Bill Brainard replied, ‘But Herb can only give you relative prices. He doesn’t have a monetary model’. Indeed, it was generally viewed then as impossible to derive a monetary theory from the Arrow2Debreu general equilibrium model. Brainard’s remark echoed decades of tradition as Hicks (1935) and Tobin (1961) had challenged microeconomic theory to present a sound account of money. THE RESPONSE Professor Brainard’s reply was an (almost) fully accurate description of the state of monetary theory embodied in the prevailing Arrow2Debreu general equilibrium model. But I hoped things were changing for the better. I had personally been trying to incorporate money in the Arrow2Debreu model and there had been progress elsewhere. Duncan Foley and I had discussed Foley (1970) prior to publication 2 that paper seemed a great start. Frank Hahn had presented Hahn (1971) in 1969 at the Econometric Society meeting. By 1973 we had Starrett (1973) which included ‘money’ in the title. These essays presented a model of...