COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 330

"A Theory of Money and Financial Institutions.
Part IV. Fiat Money and Noncooperative Equilibrium in a Closed Economy"

Martin Shubik

February 1972

Fiat money is a type of paper or symbol with which any individual may buy most things by law. It has virtually no intrinsic value but immediately assumes a trading value when its shortage can prevent trades that would have been deemed profitable in a nonmonetary competitive equilibrium system.

This paper sketches an approach to a theory of fiat money by investigating the properties of a noncooperative dynamic trading games embedded within a closed economic system.

Among the conclusions are that inflation and deflation are not symmetric, and that it is not possible to define a noncooperative game involving borrowing without specifying "rules of borrowing" or a bankruptch law.