Fiat Money in a Search Theoretical Model with Generalist Consumers


There are two general ways in which the role of fiat money has been introduced in the standard monetary search-theoretical model. The first is to bring in the model a fiat object with different intrinsic properties. The second is to introduce a centralized institution that favors the use of fiat money through specific transaction policies. We carry out a similar exercise for a modified version of the model in which agents have a different structure of preferences. We characterize the conditions for which there exist equilibria with circulating fiat money and evaluate the main differences with the results derived from the standard model.

Published as: Monetary policy and exchange rate volatility in a small open economy in Review of Economic Studies , Vol. 72, No. 3, 707-734, July, 2005