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.

Chapter 5: Absence of Double Coincidence of Wants is Essential to Monetization in a Linear Economy

Ross M. Starr

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


1 Following the model of Chapter 4, this chapter again considers a pure exchange trading post economy with linear transaction costs, and a range of transaction costs for the various commodities. Bid and ask prices for all goods in exchange for the low transaction cost good reflect its low transaction cost, creating a narrow bid2ask spread. In general equilibrium and assuming the absence of double coincidence of wants, the low transaction cost commodity becomes the common medium of exchange. Conversely, in the presence of double coincidence of wants, assuming positive linear transaction costs for all goods, there is a barter equilibrium and no monetary equilibrium. Hence, in a linear model, absence of double coincidence of wants is a necessary condition for the existence of monetary equilibrium. 1 DOUBLE COINCIDENCE OF WANTS In this chapter, we shall use again Chapter 4’s model of segmented markets with linear transaction costs. We shall consider two variants: absence of double coincidence of wants with variation in transaction costs among goods; and full double coincidence of wants. In the first case, commodity money (the low transaction cost good) arises endogenously in market equilibrium. In the second case there is a barter equilibrium and no monetary equilibrium. Thus, this last case demonstrates 2 in a linear model 2 that the absence of double coincidence of wants is essential to monetization of trade. It does so by considering the same problem with full double coincidence of wants and finding that the result is necessarily a nonmonetary equilibrium....

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