Transcript The role of money - Univerzita Karlova v Praze

JEM027
Monetary Economics
The role of money
Tomáš Holub
[email protected]
September 29, 2014
Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague
Basic question
Why does money
exist?
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Three basic roles
1
Medium of account
2
Medium of exchange (payments)
3
Store of value
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Robinson Crusoe economy
▪ No need to carry out transactions
▪ Just produce, consume and rest
▪ No role for money
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Walrasian economy
Agent 1
Agent ∞
Agent 7
Agent 2
Divine
auctioneer
Agent 6
Agent 3
Agent 4
Agent 5
▪
▪
▪
▪
No transaction costs, perfect information, perfect enforcement of contracts
Money as a unit of account (numeraire)
It can be any type of good
Not needed, just convenient
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Real world
▪ Transactions are costly (in terms of time and
resources)
▪ Information asymmetries
▪ Imperfect enforcement of contracts
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Classical approach
▪ Why money, rather than barter?
▪ Lack of double coincidence of wants (Jevons, 1875)
▪ High transaction costs of multilateral barter
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Double coincidence of wants
Money helps
Agent 1
Agent 2
Agent 1
Agent 1
Agent 2
Agent 2
Agent 3
Agent 3
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Another illustration
Resources
Transaction
technology
Indiference curve
Advances in transaction
technology
▪ Organized markets
▪ Indirect barter
▪ Commodity money
▪ Fiat money
▪ Inside money
▪ Electronic money
▪ …. (Virtul currencies?)
Time
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Desirable characteristics
Minimizing transaction costs
A
Storability
B
Divisibility
C
Easy manipulation
D
Acceptability (Menger, 1892)
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Divisibility?
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Easy manipulation?
Yap stone money (Micronesia)
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… or acceptability?
Yap stone money (Micronesia)
“
According to local legend, two or three
generations before Furness's arrival a large
stone in transit was lost at sea during a storm.
The claim to this stone continued to have value,
even though the stone itself was
unrecoverable.
Source: http://jpkoning.blogspot.cz/2013/01/yap-stones-and-myth-of-fiat-money.html
”
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Modern approach
▪ Why money, rather than credit?
▪ Asymmetric information and imperfect contracts
▪ Emphasis on acceptability of money, rather than physical
properties
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Money vs. credit
Credit may help
Money helps
Agent 1
Agent 2
Agent 3
Agent 1
Agent 2
Agent 3
... if someone does not
run away
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OLG model of money (e.g. Wallace, 1980) (1/3)
▪ Money as a store of value (improves consumption smoothing)
▪ Money circulates, only if all future generations will accept it
(multiple equilibria)
▪ But: rate-of-return-dominance puzzle (money will stop
circulating if there is a store of value with higher return)
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OLG model of money (2/3)
▪ Economy exists forever, but people live for two periods (Y,O)
only
▪ Single non-storable good
▪ People get income y only when young, it falls down from
heaven
▪ People maximize their lifetime utility ⇒ want to smooth
consumption ⇒ want to trade between young and old
▪ With no store of value (money), U=u(y), no consumption
smoothing is achieved (no double coincidence of wants)
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OLG model of money (3/3)
c0
(Pt/Pt+1)*y
▪ If generation 0 gets
money and if all future
generations are
expected to accept it,
it can start circulating,
thus improving welfare
y
cY
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Random matching model (e.g. Kyiotaki, Wright,
1992)
▪ Money as a means of transactions
▪ Multiple equilibria
▪ Money circulates, if acceptability exceeds some critical level
▪ Money may circulate even if its holding is associtated with
some (opportunity) cost (i.e. no rate-of-return-dominance
puzzle)
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Random matching model
▪ Monetary equilibrium,
π
autarchy and mixed
equilibrium
1
▪ Opportunity cost shifts
the mixed equilibrium
to the right
▪ If it exceeds some
1 Acceptability
level, monetary
equilibrium breaks
down (e.g. due to
a hyperinflation)
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Conclusions
1
Money improves welfare by reducing transaction
costs and addressing information asymmetries
2
The system might be fragile, acceptability
(credibility) is key
3
Policy implications: build credible monetary
institutions, avoid hyperinflations
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