COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1202 Fiat Money and the Efficient Financing of the Float, Production
and Consumption Martin Shubik November 1998 The basic distinction in the optimization conditions between the general equilibrium model of a T period exchange economy and a strategic market game process model is between a set of equations homogeneous of order zero and a set of nonhomogeneous equations. The latter have an amount M of outside or fiat money added to the system. If there is an outside bank willing to lend or accept deposits at an interest rate rho > 0 at the end of time T the initial amount of money M will have been consumed in interest payments to the outside bank. The price level is fully determined and in an economy where all assets are traded, the float is financed efficiently, otherwise there is a price wedge between buying and selling prices. Keywords: Fiat money, float, strategic market games. |
