Why is there Money?
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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.
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Chapter 9: Efficient Structure of Exchange

Ross M. Starr


1 Monetary trade is found to be an efficient (cost-minimizing) trading structure when the fixed cost of maintaining a trading post is high, and the marginal cost of trading volume is low. An efficient array is then N 2 1 active monetary trading posts, rather than 1N (N 2 1) barter trading posts. 2 1 WHAT EXCHANGE STRUCTURE WOULD A CENTRAL PLANNER PRESCRIBE? Chapters 4 through 8 have considered the notion of a general equilibrium trading arrangement in a trading post economy. Chapters 4 and 6 developed sufficient conditions so that a single common medium of exchange represented the general equilibrium pattern of trade. Conversely, Chapter 5 developed sufficient conditions so that a wide variety of trading posts remained active in equilibrium, a barter equilibrium. There is a long tradition in welfare economics noting the equivalence of market equilibrium to an efficient allocation of resources (Arrow, 1951). Can we make a similar claim for the market equilibrium structure of trade in a trading post economy? This chapter will develop sufficient conditions, following Starr and Stinchcombe (1999), so that the monetary structure of trade is an efficient allocation. It is reassuring that these conditions closely parallel those where a market equilibrium is monetary. However, the emphasis here is that it may not be possible to rely on a decentralized market mechanism to achieve efficient allocation. Scale economies, the construct that drives monetization in Chapters 6 and 7, is the basis of monopoly. Hence it can be seen as an impediment to...

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