Paper #160

Title:

On money as a medium of exchange when goods vary by supply and demand

Authors:

Xavier Cuadras and Randall Wright

Date:

February 1996

Abstract:

Models of the exchange process based on search theory can be used to analyze the features of objects that make them more or less likely to emerge as ``money'' in equilibrium. These models illustrate the trade--off between endogenous acceptability (an equilibrium property) and intrinsic characteristics of goods, such as storability, recognizability, etc. In this paper, we look at how the relative supply and demand for various goods affect their likelihood of becoming money. Intuitively, goods in high demand and/or low supply are more likely to appear as commodity money, subject to the qualification that which object ends up circulating as a medium of exchange depends at least partly on convention. Welfare properties are discussed.

Keywords:

Medium of exchange, search theory, supply, demand

JEL codes:

D83, E00, C73

Area of Research:

Macroeconomics and International Economics

Published in:

Macroeconomic Dynamics, 1, (1997), pp.680-700

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