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CEP discussion paper
There Will Be Money
Luis Araujo and Bernardo Guimaraes
September 2010
Paper No' CEPDP1004:
Full Paper (pdf)

JEL Classification: E40; D83

Tags: fiat money; autarky; equilibrium selection

A common belief among monetary theorists is that monetary equilibria are tenuous due to the intrinsic uselessness of fiat money (Wallace (1978)). In this article we argue that the tenuousness of monetary equilibria vanishes as soon as one introduces a small perturbation in an otherwise standard random matching model of money. Precisely, we show that the sheer belief that fiat money may become intrinsically useful, even if only in an almost unreachable state, might be enough to rule out nonmonetary equilibria. In a large region of parameters, agents’ beliefs and behavior are completely determined by fundamentals.